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Category: In the High Courts: Part A-Reported Decisions

46 Cash credit – Section 68 – A. Y. 2005-06 – Amount claimed to be long-term capital gains – Evidence of contract and payments through banks – Tribunal wrong in disregarding entire evidence and sustaining addition on sole basis of late recording on demat passbook – Addition u/s. 68 not justified

Ms. Amita Bansal vs. CIT; 400 ITR 324 (All):

Assessee is an individual. For the A. Y. an addition of Rs. 11,77,000 was made which according to the assessee was long term capital gain on sale of 11,000 share of a company. The Assessing Officer disbelieved the long term capital gain and made a corresponding addition of Rs. 11,77,000 u/s. 68 of the Income-tax Act, 1961(hereinafter for the sake of brevity referred to as the “Act”). On appeal, the assessee adduced evidence in the shape of contract notes/bill receipt, payments made through banking channels, contract notes and copies of pass book of its demat account in support of its claim and asserted its claim of long term capital gain as genuine and correct. The Commissioner (Appeals) after a detailed examination of the case of the assessee and evidence adduced by the assessee including the entries in the demat account passbook, the evidence of the broker firms through whom the transactions were made, and the contract note dated November 10, 2003, allowed the appeal. The Tribunal restored the addition on the sole ground of purchase of shares having been recorded late in the demat account of the assessee.

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i)    An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the question of fact raised before the Tribunal.

ii)    Although the fact of the purchase transaction being recorded late in the demat passbook raised a doubt as to its genuineness and this evidence was relevant to the issue, there existed other evidence, adduced by the assessee in this case, in the shape of contract notes, bank transactions pertaining to payment for purchase and sale of shares and other material relied on by the Commissioner (Appeals). The Tribunal had also not specifically dealt with the findings recorded by the Commissioner (Appeals).

iii)    In view of this, the finding of the Tribunal and the consequential order could not be sustained. The addition could not be made.”

3 Section 32 – Depreciation – Jetty – A. Y. 2005 – 06 – Rate of depreciation – 100% depreciation on temporary building structure – Jetty is a temporary structure – Entitled to 100% depreciation

CIT vs. Anand Transport; 396 ITR 204
(Mad):

The assessee was in the business of loading
and unloading of bulk cargo, relating to exports and imports, transportation of
cargo, both within and outside the ports and by see and attending to all works,
incidental to the works connected with the main business. The assessee was
awarded a contract by the MMTC on May 6, 2004. A jetty or loading platform was
erected, albeit, temporarily to facilitate loading of iron-ore onto vessels, in
furtherance of the contract awarded by MMTC, in favour of the assessee. The
assessee claimed 100% depreciation on the jetty. The Assessing Officer came to
the conclusion that the jetty or platform was a plant, as it was an apparatus
or tool which only enabled the assessee to carry on its business. The Assessing
Officer’s observation was that the jetty consisted mainly of a belt conveyor
and electrical support, and that the civil work was negligible. The Assessing
Officer further held that the conveyor belt could be dismantled and reused. He
allowed 25% depreciation on the jetty. The Tribunal allowed the assessee’s
claim.

On appeal by the Revenue, the Madras High
Court upheld the decision of the Tribunal and held as under:

“i)   A bare perusal of the
meaning of the word “jetty” would show that, it is in the nature of a
construction which is used either as a landing stage, a small pier, bridge,
staircase or a construction, built into the water to protect the harbor. The
utility of the jetty is limited by its construction. It is used to obtain
either access to a vessel, or protect the harbour.

 ii)   The provisions of the
contract would show that the jetty or loading platform was constructed by the
assessee on build-operate-transfer basis for a period of three years from the
date of commencement of the vessel loading operation. Quite clearly, the jetty
or loading platform, in this case, was erected by the assessee in order to
effectuate its business under the contract entered into with MMTC, which was
tenure based, and therefore, could not have been treated as anything else but a
temporary erection. Upon completion of the contract the assessee was required
to dismantle it.

 iii)   The fact that the jetty had other contraptions attached to it, such as a
conveyor belt, to facilitate the process of loading could not convert such a
structure into a plant. Therefore, even if the functional test was employed the
main function of a jetty, in the facts of the instant case, is to provide a
passage or a platform to ferry articles onto the concerned vessels. This could
have been done manually. That it was done by using a conveyor belt would not
convert a jetty into a plant. The assessee was entitled to 100% depreciation on
the jetty.”

2 Section 41(1) – Business income – Deemed income A. Y. 2007-08 – Remission or cessation of trading liability – Benefit must be obtained in respect of liability – Assessee a co-operative bank – Stale demand drafts and pay orders for sums owed by assessee bank to customers – Bank not deriving benefit on account of liability and liability still subsisting – Section 41(1) not applicable

CIT vs. Raddi Sahakara Bank Niyamitha;
395 ITR 652 (Karn)

The assessee was a co-operative bank. For
the A. Y. 2007-08, the Assessing Officer made an addition in the income of the
assessee on the ground of demand drafts and pay orders payable as on the last
date of the financial year, which were not so far encashed by the customers. He
treated the said amount as representing cessation of liability u/s. 41(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the “Act”)
1961, and added back the amount to the declared income of the assessee. The
Tribunal deleted the addition.

On appeal by the Revenue, the Karnataka High
Court upheld the decision of the Tribunal and held as under:

 “i)   In order to invoke
section 41(1) of the Act, 1961, it must be first established that the assessee
had obtained some benefit in respect of a trading liability which was earlier
allowed as a deduction. It is not enough if the assessee derives some benefit
in respect of such liability, but it is essential that such benefit arises by
way of “remission” or “cessation” of liability.

 ii)   The addition could not be
made u/s. 41(1) of the Act, since the liability of the assessee bank to pay
back the amounts to the customers in respect of such stale demand drafts and
pay orders does not cease in law. The appeal is dismissed.”

1 Section 37(1) – Business expenditure -A. Ys. 1997-98 to 2002-03, 2004-05 and 2009-10 – Year in which deductible (Licence fee) – Assessee, sole proprietor of Oil Corporation, was granted licence by Northern Railway for use of a piece of Railway land against a licence fee – On 20/01/1999, Northern Railway revised licence fee taking revised base rate as on 01/01/1985 – Thereafter, for each of years from A. Y. 2002-03 till A. Y. 2008-09, Northern Railway issued letters demanding enhanced licence fees and damages – Assessee paid actual licence fee and claimed deduction on account of licence fee but had disputed enhanced liability – AO disallowed licence fee on ground that it was a contingent liability and not allowable as a deduction till liability for enhanced licence fee, which had been contested by assessee, actually crystallized

1 Business expenditure
– Section 37(1) – A. Ys. 1997-98 to 2002-03, 2004-05 and 2009-10 – Year in
which deductible (Licence fee) – Assessee, sole proprietor of Oil Corporation,
was granted licence by Northern Railway for use of a piece of Railway land
against a licence fee – On 20/01/1999, Northern Railway revised licence fee
taking revised base rate as on 01/01/1985 – Thereafter, for each of years from
A. Y. 2002-03 till A. Y. 2008-09, Northern Railway issued letters demanding
enhanced licence fees and damages – Assessee paid actual licence fee and
claimed deduction on account of licence fee but had disputed enhanced liability
– AO disallowed licence fee on ground that it was a contingent liability and
not allowable as a deduction till liability for enhanced licence fee, which had
been contested by assessee, actually crystallized – Since assessee was
following mercantile system of accounting, liability to pay enhanced licence
fee would arise in year in which demand was made or to which it related
irrespective of when enhanced fee was actually paid by assessee 

Jagdish Prasad Gupta vs. CIT; [2017] 85
taxmann.com 105 (Delhi):

The assessee the sole proprietor of Oil
Corporation was granted licence by the Northern Railway for use of a piece of
Railway land for constructing and maintaining a depot for storage of petroleum
products etc. By a letter dated 08/02/1980, the Northern Railway revised
the licence fee. On 23/03/1988, the Northern Railway further enhanced the
licence fee. The Northern railway further terminated the licence for use of the
land on the ground that the assessee had failed to deposit the licence fees.
The Northern Railway applied to the Estate Officer (EO) praying for eviction of
the assessee from the land in question. The said application was disposed of by
the EO holding that the enhancements were made by the Northern Railway too
frequently and without legal basis. Further on 20/01/1999, the Northern Railway
revised the licence fee taking the base rate as on 01/01/1985. Thereafter, for
each of the years from assessment year 2002-03 till assessment year 2008-09,
the Northern Railway issued letters demanding enhanced licence fees and
damages. The tax treatment of the claim of the assessee in its income-tax
returns of the enhanced licence fee was deduction. The said claim was allowed
by the Assessing Officer for A. Ys. 1987-88 to 1994-95. For A. Ys. 1996-97 to
1999-2000, the Assessing Officer allowed the licence fee actually paid by the
assessee, holding that it was a contingent liability and not allowable as a
deduction till the liability for the enhanced licence fee, which had been
contested by the assessee, actually crystalised. CIT(A) and the Tribunal
allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

 “i) The undisputed
fact is that the assessee is following the mercantile system of accounting. It
has to book the liability in the year in which it arises irrespective of
whether it in fact discharges the liability in that year. In that sense, the
liability to pay the enhanced licence fee would arise in the year in which
demand is made or to which it relate irrespective of when the enhanced fee is
actually paid by the assessee.

 ii)   In the present case,
the liability of the assessee to pay the enhanced licence fee has, far from
being excused, sought to be enforced by the Northern Railway by repeated demands
notwithstanding the EO’s order dated 28/03/1990. As noted earlier, the Northern
Railway has preferred claim for arrears of enhanced licence fees and damages to
the tune of over Rs. 45 crores against the assessee before the sole Arbitrator
appointed by it. The demand is therefore very much alive and is subject matter
of adjudication in arbitration proceedings.

 iii)  The order dated
29/03/1990 of the EO no doubt holds the termination notice dated 23/03/1988 and
the claim for enhanced licence fee to be bad in law. However, it does not hold
that there is no liability on the assessee to pay the enhanced licence fees as
and when that is determined in accordance with law. The EO has in fact observed
that the Northern Railway ‘should form a definite policy in revising the
licence fee for a considerable period on uniform basis by incorporating the law
of principles of natural justice to avoid unnecessary litigation thereby not
causing losses of revenue to the railway administration under these
circumstances and ensuring prompt and regular payment of licence fee by
licencees.’ Also the EO ends the order by stating. The applicant is free to
revise the licence fee in accordance with the provisions of law and as per
terms of agreement. The order of the EO read in the correct perspective,
requires the Northern Railway to follow the due process of law by giving a
hearing to those adversely affected by the upward enhancement of liability
before a decision is taken. The Revenue’s characterisation of the said order,
as negating the liability to pay the enhanced licence fee for all times to come
does not flow on the above reading of the said order. On the other hand, it is
more consistent with the plea of the assessee that while he is not denying the
liability to pay the licence fee he is only questioning the procedure involved
in its revision which, according to him, is not in accordance with law.
Consequently, it could not be said that the assessee has sought to mislead this
Court by contending that he is not questioning the liability to pay licence fee
but is only questioning the quantification or the quantum of the licence fee.

 iv)  While the revenue may be
right in pointing out that for assessment years 2002-03 to 2005-06, the
assessee claimed only Rs. 35,37,300 as deduction on the ground of enhanced
licence fee although it could have claimed the further enhancement which had
taken place by then, the fact remains that the enhanced liability claimed by
the Railways by its letter dated 20/01/1999 and later by the letter dated 29/07-1999
subsisted and was /being demanded. The explanation offered by the assessee for
this inconsistency in its claim is a plausible one. It does not deter from the
position that being an accrued liability, the enhanced licence fee can be
claimed by it as a deduction in the year in which such liability arose.

 v)   In the arbitration
proceedings, the claim of the Railways includes the claim for the enhanced
licence fee as well as the arrears. The arbitration proceedings could end
either in favour of the Railways or the assessee. If it goes in favour of the
assessee, it would then have no liability to pay such enhanced licence fee and
in the year in which such final decision is rendered, the corresponding
reversal of entries will have to take place in terms of section 41(3). All of
this, in no way, extinguishes the liability of the assessee to pay the licence
fee. The assessee would be justified in claiming the enhanced licence fee as
deduction in the year in which such enhancement has accrued even though the
assessee has not paid such enhanced licence fee in that year. This legal
proposition is well settled.

 vi) The Railways has already
filed its claim before the Arbitrator for the arrears of licence fees and
‘damages’. As rightly held by the Commissioner (Appeals), and concurred with by
the Tribunal, the mere characterisation by the Northern Railway of the amount
claimed by it from the assessee as ‘damages’ will not, in the context of the
present case, make it any less an accrued liability. It is an expenditure
incurred by the assessee corresponding to the income he derives from using the
land for the purposes of his business.

 vii) The Tribunal did not
make a grievous error, in the order passed by it, regarding the claim for
enhanced licence fee as a deduction being allowable not in assessment year
1995-96 but in assessment year 1996-97. The argument that the Tribunal may have
exceeded its jurisdiction done not hold since the revenue has, apart from not
challenging the said order, implemented it fully by the consequent appeal
effect order.

 viii) For all of the above
reasons, the first issue is decided in favour of the assessee and against the
revenue by holding that the liability of the assessee to pay enhanced licence
fees for the assessment years in question was an accrued liability which arose
in the year in which demand was raised.”

20 Sections 2(15) and 12AA – Charitable purpose – Registration and cancellation – A. Y. 2009-10 – Exclusion of advancement of any other object of general public utility, if it involved carrying out activities in nature of trade, commerce or business with receipts in excess of Rs. 10 lakh – Dominant function of assessee to provide asylum to old, maimed, sick or stray cows – Selling milk incidental to its primary activity – No bar on selling its products at market price – Assessee not hit by proviso to section 2(15) – No need to cancel registration of assessee

20.  Charitable
purpose – Registration and cancellation – Sections 2(15) and 12AA – A. Y.
2009-10 – Exclusion of advancement of any other object of general public
utility, if it involved carrying out activities in nature of trade, commerce or
business with receipts in excess of Rs. 10 lakh – Dominant function of assessee
to provide asylum to old, maimed, sick or stray cows – Selling milk incidental
to its primary activity – No bar on selling its products at market price –
Assessee not hit by proviso to section 2(15) – No need to cancel registration
of assessee 

DIT
(Exemption) vs. Shree Nashik Panchvati Panjrapole; 397 ITR 501 (Bom)

The
assessee trust was registered with the Charity Commissioner since 1953. The
assessee was granted a certificate 
of  registration u/s. 12A of the
Act, on 04/08/1975. By Finance (No. 2) Act, 2009, the definition of “charitable
purpose” u/s. 2(15) of the Act, was amended w.e.f. April 12, 2009. According to
the newly added proviso, charitable purpose would not include advancement of
any other object of general public utility, if it involved carrying out
activities in the nature of trade, commerce or business, with receipts in
excess of Rs. 10 lakh. The Director of Income-tax (Exemption) issued a show
cause notice upon the assessee and held that the activities carried out by the
assessee of selling milk were in the nature of trade, commerce or business and
thus, the assessee was not entitled to registration u/s. 12A of the Act. In
response to the show-cause notice, the assessee pointed out that it was running
a panjrapole i.e., for protection of cows and oxen for over 130 years. The
activity of selling milk was incidental to its panjrapole activity and in any
case did not involve any trade, commerce or business, so as to be hit by the newly
added proviso to section 2(15) of the Act. But the Director of Income-tax
(Exemption) cancelled the assessee’s registration under the Act invoking
section 12AA(3) of the Act, in view of the newly added proviso to section 2(15)
of the Act. The Tribunal held that the activity of selling milk would be
incidental to running a panjrapole and the proviso to section 2(15) of the Act
was not applicable. The Tribunal set aside the order of the Director of
Income-tax (Exemption) cancelling the registration.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:


i)   The
appeal should be decided only on the grounds mentioned in the order for
cancellation of registration and no other evidence not considered by the Director
of Income-tax (Exemption) could be looked into, while deciding the validity of
the order. The Tribunal recorded a finding of fact that the dominant function
of the assessee was to provide asylum to old, maimed, sick and stray cows.
Further, only 25% of the cows being looked after yielded milk and if the milk
was not procured, it would be detrimental to the health of the cows. Therefore,
the milk which was obtained and sold by the assessee was an activity incidental
to its primary activity of providing asylum to old, maimed, sick and disabled
cows.

 

ii)   The
activity of milking the cows and selling the milk was necessary in the process
of giving asylum to the cows. An incidental activity of selling milk which
might be resulting in receipt of money, by itself would not make it trade,
commerce or business nor an activity in the nature of trade, commerce or
business to be hit by proviso to section 2(15) of the Act.

 

iii)   Further,
the fact that the milk was sold at market price would make no difference as
there was no bar in law on a trust selling its produce at market price.
Therefore there was no need to cancel the registration. The appeal is
dismissed.”

19 Section 68 – Cash credit – A.Y. 2006-07 – Sums outstanding against trade creditors for purchases – Appellate Tribunal concluding that assessee having failed to furnish confirmation had paid in cash from undisclosed sources – Finding not based on any material but on conjectures and surmises – Perverse – Addition cannot be sustained

19.  Cash credit – Section 68 – A.Y. 2006-07 –
Sums outstanding against trade creditors for purchases – Appellate Tribunal
concluding that assessee having failed to furnish confirmation had paid in cash
from undisclosed sources – Finding not based on any material but on conjectures
and surmises – Perverse – Addition cannot be sustained

Zazsons
Export Ltd. vs. CIT; 397 ITR 40 (All):

The assessee was a
manufacturer of leather goods for export purposes. It purchased the raw
material on credit from petty dealers, who were shown as trade creditors in the
books of account, and payments were made subsequently. For the A.Y. 2006-07,
the assessee disclosed the purchase of raw materials from small vendors, part
of which amount was confirmed and the remaining was unconfirmed. Such
unconfirmed amount was treated as cash credits u/s. 68 of the Income-tax Act,
1961 (hereinafter for the sake of brevity referred to as the “Act”),
and added as income of the assessee. The Commissioner (Appeals) deleted the
addition. The Appellate Tribunal restored the addition on the ground that the
assessee had failed to confirm the amount and that such purchases were made on
cash payment, which had not been accounted for and as such liable to be added
to the assessee’s income u/s. 68.

On appeal by the assessee,
the Allahabad High Court reversed the decision of the Tribunal and held as
under:


i)   The
credit purchases of raw material shown in the books of account of the assessee
from petty dealers even if not confirmed would not mean that it was concealed
income or deemed income of the assessee, which could be charged to tax u/s. 68
of the Act. The finding of the Appellate Tribunal that it was possible that the
assessee paid them in cash from undisclosed sources without accounting for it
and therefore, the amount paid was to be added to the income of the assessee,
was based on no material but on conjectures and surmises. The purchases made by
the assessee were accepted by the Assessing Officer and the trade practice that
payment in respect of the purchases of raw material was made subsequently was
not disputed. Therefore, its finding was perverse.

 

ii)   In
order to maintain consistency, a view which had been accepted in an earlier
order ought not to be disturbed unless there was any material to justify the
Department to take a different view of the matter. In respect of the earlier
assessment year, 2005-06, the Department had accepted the decision of the
Appellate Tribunal that the trade amount due to the trade creditors in the
books of account of the assessee could not be added to the income of the
assessee. There was nothing on record to show that any appeal had been filed by
the Department against that order, which had become conclusive.

 

iii)   The
appeal is allowed insofar as the addition of Rs. 1,05,01,948 u/s. 68 of the Act
is concerned.”

27 Sections 147 and 148 – Reassessment Sections 147 and 148 – A.Ys. 1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded for reopening of assessments – Not mere procedural lapse – Notices and proceedings vitiated

27.  Reassessment – Sections 147 and 148 – A.Ys.
1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded
for reopening of assessments – Not mere procedural lapse – Notices and
proceedings vitiated 

Principal CIT vs. Jagat Talkies Distributors; 398 ITR 13 (Del):

The
assessee did not file returns u/s. 139(1) of the Act, for the A.Ys. 1999-00 to
2004-05, but had filed returns for earlier years. On the basis of information
received from the banks to which the assessee had let out its property, it was
discovered by the Department that rent had been paid to the assessee by them
after deducting tax at source. The Assessing Officer recorded reasons for
reopening of the assessment u/s. 147 and issued notices u/s. 148 asking the
assessee to file the returns. Pursuant to the notice, the assessee filed
returns which disclosed the income from the property and the business income.
The Assessing Officer initiated the assessment proceedings by issuing notices
u/s. 143(2) and section 142(1) of the Act. The assessee sought supply of the
reasons recorded for the reopening of the assessments. The reasons were not
furnished by the Assessing Officer to the assessee. Since the assessment was
getting time barred, the Assessing Officer made additions on account of the
income from house property and passed separate reassessment orders in respect
of each of the assessment years in question. The Appellate Tribunal held that
the failure to supply the reasons u/s. 148 despite the request made by the
assessee, vitiated the entire reassessment proceedings.


On
appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal
and held as under:

i)    The Appellate Tribunal was right in holding
that on account of failure on the part of the Assessing Officer to furnish the
copy of reasons recorded for reopening the assessments u/s. 147, to the
assessee, the reassessment proceedings stood vitiated. Failure by the Assessing
Officer to provide the assessee the reasons recorded for reopening the assessment
could not be treated as a mere procedural lapse.

 

ii)   The assessments for the A.Ys 1999-00 onwards
for five years were sought to be reopened. Having contested those proceedings
for nearly two decades, the Department was not fair in making the offer to
consider the assessee’s objections to the reopening and pass orders thereon. No
reasons could be discerned why the Assessing Officer had failed to furnish to
the assessee the reasons for reopeniong the assessments. It was not disputed
that the assessee had made requests in writing for reasons in respect of each
of the assessment years in question.

 

iii)   Merely because the assessee did not repeat
the request did not mean that it had waived its right to be provided with the
reasons for reopening the assessment. According to the provisions of section
292BB(1) there was no estoppels against the assessee, on account of
participating in the proceedings, as long as it had raised an objection in
writing regarding the failure by the Assessing Officer to follow the prescribed
procedure. No question of law arose.

 

26 Sections 200, 201 and 221 – Penalty – DS – A.Y. 2009-10 – Foreign company Expatriate employees – Failure to deposit tax deducted at source with Central Government within prescribed time – Penalty – Delay in depositing amount on account of lack of proper understanding of Indian tax laws and compliance required thereunder – Tax deducted at source deposited with interest before issuance of notice – Sufficient and reasonable cause shown by assessee – Deletion of penalty proper

26. Penalty – TDS – Sections 200, 201 and 221 – A.Y.
2009-10 – Foreign company Expatriate employees – Failure to deposit tax
deducted at source with Central Government within prescribed time – Penalty –
Delay in depositing amount on account of lack of proper understanding of Indian
tax laws and compliance required thereunder – Tax deducted at source deposited
with interest before issuance of notice – Sufficient and reasonable cause shown
by assessee – Deletion of penalty proper


Principal
CIT(TDS) vs. Mitsubishi Heavy Industries Ltd.; 397 ITR 521(P&H):


The assessee was a company
registered in Japan. For the F. Y. 2008-09, it deducted tax at source u/s. 200
of the Act, on the salaries paid to its employees sent on secondment to India.
The assessee failed to deposit the amount of tax deducted at source within the
prescribed time limit as laid down under rule 30 of the Income-tax Rules, 1962.
A notice u/s. 201 r.w.s. 221(1) was issued to the assessee for failure to
comply with the provisions of Chapter XVIIB. The assessee, inter alia,
submitted that the delay in depositing the amount was on account of lack of
proper understanding of Indian tax laws and the compliance required thereunder.
It further submitted that the tax deducted at source had been deposited along
with interest on 05/06/2009, before the issuance of the notice. By an order
dated 10/08/2010, the Assessing Officer held that the assessee is deemed to be
an “assessee in default” u/s. 201 and imposed penalty u/s. 221. The
Commissioner (Appeals) cancelled the penalty and held that there was sufficient
and reasonable cause before the Department for the assessee’s non-compliance
with the provisions of tax deducted at source as the deduction of tax at source
involved complexities and uncertainty and that therefore, the order passed by
the Assessing Officer imposing penalty was unsustainable. The Appellate
Tribunal upheld the decision of the Commissioner (Appeals).


On
appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of
the Tribunal and held as under:


The Department had not
been able to show any illegality or perversity in the findings recorded by the
Commissioner (Appeals) which had been affirmed by the Appellate Tribunal. No
question of law arose.

25 Sections 147 and 148 – Reassessment Notice after four years – Failure by assessee to disclose material facts necessary for assessment – No evidence of such failure – Notice not valid

25. Reassessment
– Sections 147 and 148  – A. Y. 2004-05 –
Notice after four years – Failure by assessee to disclose material facts
necessary for assessment – No evidence of such failure – Notice not valid 

Anupam
Rasayan India Ltd. vs. ITO; 397 ITR 406 (Guj):

For the A.Y. 2004-05, the
assessment of the assessee company was completed u/s. 143(3) of the Act,
wherein the total income was computed at Nil and the company was allowed to
carry forward the unabsorbed depreciation of Rs. 3.81 lakh. Thereafter the
Assessing Officer issued a notice u/s. 148 dated 28/09/2009 seeking to reassess
the assessee’s income for the A. Y. 2004-05. The assessee filed writ petition
challenging the validity of the notice.

The Gujarat High Court
allowed the writ petition and held as under:

i)   While
citing five different reasons for exercising the power of reassessment, the
Assessing Officer in each case had started with the preamble “on going through
the office record it is seen that …” or something similar to that effect. In
essence therefore, all the grounds of reopening emerged from the materials on
record.

 

ii)   In
the background of the documents on record and the scrutiny previously
undertaken by the Assessing Officer it was clear that there was no failure by the
assessee to disclose material facts necessary for assessment. The notice for
reassessment was not valid.”

 

24 Income Computation and Disclosure Standards (ICDS) are intended to prevail over the judicial precedents that are contrary. Section 145 permits Central Government to notify ICDS but not to bring about changes to settled principles laid down in judicial precedents which seek to interpret and explain statutory provisions contained in the Income-tax Act (Act)

24. Income
Computation and Disclosure Standards (ICDS) are intended to prevail over the
judicial precedents that are contrary. Section 145 permits Central Government
to notify ICDS but not to bring about changes to settled principles laid down
in judicial precedents which seek to interpret and explain statutory provisions
contained in the Income-tax Act (Act) 

Chamber of
Tax Consultants vs. UOI; [2017] 87 taxmann.com 92 (Delhi)

The Chamber of Tax
Consultants challenged the validity of Income Computation and Disclosure
Standards (ICDS)notified by the Department. The Delhi High Court held as under:

Article 265 of the
Constitution of India states that no tax shall be levied or collected except
under the authority of law. Section 145(2) does not permit changing the basic
principles of accounting that have been recognised in various provisions of the
Act unless, of course, corresponding amendments are carried out to the Act
itself.

In case the ICDS seeks to
alter the system of accounting, or to accord accounting or taxing treatment to
a particular transaction, then the legislature has to amend the Act to
incorporate desired changes.

The Central Government
cannot do what is otherwise legally impermissible. Therefore, the following
provisions of ICDS are held as ultra vires and are liable to be struck
down:-


(1)  ICDS-I
: It does away with the concept of ‘prudence’ and is contrary to the Act
and to binding judicial precedents. Therefore, it is unsustainable in law.

 

(2)  ICDS-II
: It pertains to valuation of inventories and eliminates the distinction
between a continuing partnerships in businesses after dissolution from the one
which is discontinued upon dissolution. It fails to acknowledge that the
valuation of inventory at market value upon settlement of accounts on a partner
leaving which is distinct from valuation of the inventory in the books of the
business which is continuing one.

 

(3)  ICDS-III
: The treatment of retention money under Paragraph 10 (a) in ICDS-III will have
to be determined on a case-to-case basis by applying settled principles of
accrual of income.

 

a.  By deploying ICDS-III in a manner that seeks
to bring to tax the retention money, the receipt of which is
uncertain/conditional, at the earliest possible stage, irrespective of the fact
that it is contrary to the settled position, in law, and to that extent para 10
(a) of ICDS III is ultra vires.

b.  Para 12 of
ICDS III, read with para 5 of ICDS IX, dealing with borrowing costs, makes it
clear that no incidental income can be reduced from borrowing cost. This is
contrary to the decision of the SC in CIT vs. Bokaro Steel Limited
[1999] 102 Taxman 94 (SC).

 

(4)  ICDS
IV : It deals with the bases for recognition of revenue arising in the
course of ordinary activities of a person from sale of goods, rendering of
services and used by others of the person’s resources yielding interest,
royalties or dividends.

 

a.  Para 5 of ICDS-IV requires an assessee to
recognise income from export incentive in the year of making of the claim, if
there is ‘reasonable certainty’ of its ultimate collection. This is contrary to
the decision of the SC in Excel Industries [2013] 38 taxmann.com 100.

b.  As far as para 6 of ICDS-IV is concerned, the
proportionate completion method as well as the contract completion method have
been recognized as valid methods of accounting under the mercantile system of
accounting by the SC in CIT vs. Bilhari Investment Pvt. Ltd. [2008] 168
Taxman 95. Therefore, to the extent that para 6 of ICDS-IV permits only one of
the methods, i.e., proportionate completion method, it is contrary to the above
decisions, held to be ultra vires.

 

(5)  ICDS-VI
: It states that marked to market loss/gain in case of foreign currency
derivatives held for trading or speculation purposes are not to be allowed that
is not in consonance with the ratio laid down by the SC in Sutlej Cotton
Mills Limited vs. CIT [1979] 116 ITR 1.

 

(6)  ICDS-VII
: It provides that recognition of governmental grants cannot be postponed
beyond the date of accrual receipt. It is in conflict with the accrual system
of accounting. To this extent, it is held to be ultra vires.

 

(7)  ICDS-VIII
: It pertains to valuation of securities.


a.  For those entities which aren’t governed by
the RBI to which Part A of ICDS-VIII is applicable, the accounting prescribed
by the AS has to be followed which is different from the ICDS.

b.  In effect, such entities are required to
maintain separate records for income-tax purposes for every year, since the
closing value of the securities would be valued separately for income-tax
purposes and for accounting purposes.

23 Income or capital receipt – A. Y. 2004-05 – Sales tax subsidy – Is capital receipt

23.  Income or capital receipt – A. Y. 2004-05 –
Sales tax subsidy – Is capital receipt 

CIT vs.
Nirma Ltd.; 397 ITR 49 (Guj):

Dealing with the nature of
sales tax subsidy the Gujarat High Court held as under:

i)   The
character of the subsidy in the hands of the recipient whether revenue or
capital will have to be determined having regard to the purpose for which the
subsidy is given. The source of fund is quite immaterial.

 

ii)   Where
a subsidy though computed in terms of sales tax deferment or waiver, in essence
was meant for capital outlay expended by the assessee for setting up the unit
in the case of a new industrial unit and for expansion and diversification of
an existing unit, it would be a capital receipt.

22 U/s. 10A – Exemption – A.Y. 2005-06 – Newly established undertaking in free trade zone – Units set up with fresh investments – Units not formed by reconstruction or expansion of earlier business – Business of each unit independent, distinct, separate and not related with other – Assessee entitled to deduction u/s. 10A

22. Exemption
u/s. 10A – A.Y. 2005-06 – Newly established undertaking in free trade zone –
Units set up with fresh investments – Units not formed by reconstruction or
expansion of earlier business – Business of each unit independent, distinct,
separate and not related with other – Assessee entitled to deduction u/s. 10A

 CIT vs.
Hinduja Ventures Ltd.; 397 ITR 139; (Bom):

The assessee had four units
engaged in the business of information technology and information technology
enabled services. For the A.Y. 2005-06, the assesee claimed deduction u/s. 10A
of the Act, in respect of unit II and unit III. The Assessing Officer did not
allow deduction u/s. 10A. Even though the remand report was in favour of the
assessee, the Commissioner (Appeals) confirmed the order of the Assessing
Officer. The Tribunal agreed with the remand report of the Assessing Officer
and held that unit II and unit III were entitled to the benefit u/s. 10A of the
Act.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

 

“i)   The
Assessing Officer in his remand report had specifically observed that both
units were set up with fresh investment. The assessee purchased plant and
machinery for these units and it was not the case that these units were formed
by splitting or reconstructing existing business.

 

ii)   Separate
books of account were maintained. The employees of each of the units were fresh
set of employees and were not transferred from the existing business. The
nature of activity of both units was totally different. The customers of each
unit were completely different and unrelated and both the units had new and
independent sources of income.

 

iii)   Thus,
unit II and unit III were not formed by reconstruction of earlier business nor
were they expansions thereof. Though permission was sought by way of an
expansion, the facts on record categorically and succinctly establish that the
business of unit II and unit II was independent distinct and separate and they
were not related with each other or even with unit I. Therefore, the assessee
was entitled to benefit u/s. 10A of the Act.”

21 u/s. 11 – Charitable purpose – Exemption – A.Y. 2012-13 – Assessee incurring expenditure for upkeep of priests who belonged to particular community – Programmes conducted by assessee open to public at large – Activity of assessee not exclusively meant for one particular religious community – Assessee is entitled to exemption u/s. 11

21.  Charitable  
purpose   –   Exemption  
u/s.  11  – A.Y. 2012-13 – Assessee incurring
expenditure for upkeep of priests who belonged to particular community –
Programmes conducted by assessee open to public at large – Activity of assessee
not exclusively meant for one particular religious community – Assessee is
entitled to exemption u/s. 11


CIT vs.
Indian Society of the Church of Jesus Christ of Latter day Saints.; 397 ITR 762
(Del):


The assessee was registered
u/s. 12A(a) of the Act. The main object of the assessee was to undertake the
dissemination of useful religious knowledge in conformity with the purpose of
the Church of Jesus Christ of Latter-Day Saints, to assist in promulgation of
worship in the Indian Union, to establish places of worship in the Indian Union,
to promote sustain and carry out programmes and activities of the Church, which
were among others, educational, charitable, religious, social and cultural. A
second amendment to the memorandum and articles of association was adopted by
the assessee and it included providing educational opportunities to its young
members who  could  not 
afford  to  finance their education. For the A. Y. 2012-13, the
Assessing Officer held that the assessee was incurring expenditure for upkeep
of the priests who belonged to a particular community and did not pursue any
activity in the true nature of charity for the general public directly itself.
The Assessing Officer noted that the expenses incurred by the assessee included
donations for general public utility. However, on the ground that it
constituted “a very small part of the total expenditure”, the Assessing Officer
held that the assessee was not using its funds for public benefit but rather
for the benefit of specified persons u/s. 13(3) of the Act. He held that section
13(1)(b) of the Act would be attracted and it could not be granted exemption
u/s. 11 of the Act. The Tribunal granted exemption u/s. 11 of the Act.


On appeal by the Revenue
the Delhi High Court upheld the decision of the Tribunal and held as follows:


“The Tribunal found that
the programmes conducted by the society were open to the public at large
without any distinction of cast, creed or religion and the benefits of these
programmes held at the meeting house were available to the general public at large.
Since the activity if the assessee, though both religious and charitable, were
not exclusively meant for one particular religious community, the assessee was
rightly not denied exemption u/s. 11 of the Act.”

38. Revision – Scope of power of Commissioner – Section 264 1 – A. Y. 2006-07 – Record includes all records relating to any proceedings – Not confined to return of income and assessment order in case of assessee – Order passed on other party treating lease rent received by it from assessee as its income – Application by assessee for revision on basis of order – Order can be considered and applied to allow deduction in assessee’s hands – Remedy u/s. 264 appropriate

Selvamuthukumar vs. CIT; 394 ITR 247 (Mad):

The petitioner had entered into an agreement with S for the
purchase of its hostel buildings. The hostels were being managed by the
petitioner pending finalisation of sale and depreciation claimed thereupon in
respect of A. Ys. 2003-04 to 2005-06. The transaction could not be completed
and upon cancellation of the agreement the hostels reverted back to S in
December 2005. The petitioner received back only a sum of Rs. 8,63,70,652 as
against the consideration of Rs. 9,79,44,847 paid by it originally.
Accordingly, no depreciation was claimed in the A. Y. 2006-07. For the purpose
of taxability on the transaction, an order u/s. 144A of the Act, 1961 was
passed to the effect that the transaction was one of lease. The Assessing
Officer of S was directed to bring to tax the difference between the amount of
the original sale consideration received and the amount returned by it to the
assessee pursuant to the cancellation of the sale agreement, considering it as
lease rent to be spread over four years pro rata. The order u/s. 144A had
attained finality. Consequently, the assessee claimed the lease rentals paid by
it over the period of the four A. Ys. 2003-04 to 2006-07, as business
expenditure u/s. 37. Notices u/s. 148 were issued to the assessee for
reassessment in respect of the A. Ys. 2003-04 to 2005-06 and the claims for
depreciation and the claim of lease rentals as business expenditure were allowed
in the reassessment. The assessee filed revision petition u/s. 264 before the
Commissioner for deduction of lease rentals for the A. Y. 2006-07. The
Commissioner rejected the application on the ground, that, (a) the order u/s.
144A was passed in the case of S and as such was not relevant in the case of
any other assessee and, (b) the power to revise u/s. 264 was specific to
consideration of any issue discussed or decided in an order of assessment which
was not the case of the assessee. He was of the view that the contention raised
by the assessee did not emanate from either the return filed by him or the
order of assessment and therefore, jurisdiction u/s. 264 could not be invoked.

The Division Bench of the Madras High Court allowed the writ
petition filed by the assessee and held as under:

“i)  The embargo placed on an Assessing Officer in
considering a new claim would not impinge on the power of the appellate
authority or revisional authority.

ii)  Section 264 of the Act has been inserted as a
parallel and alternate remedy and relief available to an assessee. It provides
powers to the Commissioner to make or cause such enquiry to be made as he
thinks fit in dealing with an application for revision. The power u/s. 264 is
wide and extends to passing any order as the Principal Commissioner or
Commissioner may think fit after making an inquiry and subject to the
provisions of the Act, suo moto or on an application by the assessee.

iii)  The order passed u/s. 144A of the Act in the
case of S had relevance in the assessment of the assessee for the reason that
the transaction dealt with in that order was one between S and the assessee.
Effect had been given to the directions in the order u/s. 144A in the
assessment of S as well as in the assessment of the assessee for the A. Ys.
2003-04 to 2005-06. There was no reason why a different conclusion was taken
for the A. Y. 2006-07, when the transaction, the facts, the circumstances and
the law remained identical and unchanged throughout. Even applying the
principle of consistency, the treatment accorded to an issue that arose in a
continuing transaction should be consistent for the entire period.

iv) Section 264 provides powers to the Commissioner
to make or cause such inquiry to be made as he thought fit while deciding an
application for revision which included taking into consideration, the relevant
material that had a bearing on the issue under consideration, which in the
assessee’s case, include the order issued to S u/s. 144A. The order u/s. 144A
ought to have been taken into consideration and applied.

v)  The order u/s. 264 was appropriate and ought
to have been exercised in favour of the assessee by the Commissioner.”

37. Penalty – Block assessment – Sections 132(4), 158BC and 158BFA(2) – On mutual understanding with department, director of assessee – company filed return showing undisclosed income and assessee filed Nil return – Undisclosed income assessed finally partly in hands of director and partly in hands of assessee – Penalty not leviable on assessee

CIT vs. Saraf Agencies Ltd.; 394 ITR 444(Cal):

Pursuant to a search and seizure, the assessee company and
its director filed returns. On a mutual understanding with the Department, the
director of the assessee-company filed return showing undisclosed income of Rs.
2,02,66,971 and the assessee filed Nil return. The Assessing Officer assessed
the undisclosed income of the assessee company at Rs. 491.50 lakh and initiated
penalty proceedings u/s. 158BFA(2) of the Act, 1961. The undisclosed income of
the assessee was reduced to Rs. 37 lakh by the Commissioner (Appeals). The
Assessing Officer imposed penalty u/s. 158BFA(2) on the undisclosed income of
Rs. 37 lakh. The Commissioner (Appeals) deleted the penalty. The Commissioner
(Appeals) held that the developments in the course of the assessment
proceedings did not modify the quantum of undisclosed income but only the
proportion of distribution of the undisclosed sum between the assessee and the
director. He also held that the director was acting upon some kind of understanding
about the person who should make the declaration and that the levy of penalty
on the technical ground that the assessee declared nil undisclosed income u/s.
158BC of the Act and that there was some income found after the appellate
decision, was not justified and cancelled the penalty. The Tribunal upheld the
order of the Commissioner (Appeals).

On appeal by the Revenue, the Calcutta High Court upheld the
decision of the Tribunal and held as under:

“i)  The imposition of penalty, when the returns of
undisclosed income were filed in consultation with the Department, was
inequitable. What had emerged after the search and seizure was that the
Department itself was unable to conclude whether the undisclosed income
belonged to the assessee or its director. It was on the basis of an
understanding arrived at between the parties that the director had made a
disclosure of Rs. 2.16 crore and the assessee filed a nil return. Finally, the
undisclosed income of the director was assessed at Rs. 2.02 crore approximately
and that of the assessee at Rs. 37 lakh.

ii)  Both
the Commissioner (Appeals) and the Tribunal had held that in the facts of the
case no penalty should be levied upon the assessee. The understanding arrived
at between the Department, the assessee and the director had not been disproved
nor had that finding been assailed. The cancellation of penalty was justified.“

36. Income- Exempt income – A. Y. 1991-92 – When the royalty and interest income were claimed as exempt on accrual basis in earlier years, forex fluctuation gain or loss arising on receipt of such income in subsequent period could not also be considered as exempt. Such gain or loss could not be considered as part of royalty or interest income and it should be taxed on basis of AS-11

Ballarpur Industries Ltd. vs. CIT; [2017] 84 taxmann.com
61 (Bom)

Assessee-company had accounted for royalty and interest
income on accrual basis, which were exempt under the then India-Malaysia DTAA.
During the subsequent period (A. Y. 1991-92), the assessee had received such
income that was more than what was accounted in earlier years due to exchange
differences. The assessee argued that the exchange difference should be treated
as part of royalty and interest income. Accordingly, it would be exempt from
tax as per India-Malaysia DTAA. The Assessing Officer did not accept the
assessee’s claim and assessed the exchange difference as taxable income. The
Tribunal upheld the decision of the Assessing Officer.

On reference by the assessee, the Bombay High Court upheld
the decision of the Tribunal and held as under:

“i)  Gain or loss arising on account of foreign
exchange variation could not bear the same character of exempt income

ii)  The revenue had correctly placed reliance on
AS 11 which indicates that benefit derived on account of currency fluctuation
after the year of accrual is to be considered as income or expense in the
period in which they arise

iii)  This gain/loss on account of foreign exchange
fluctuation is not part of royalty and interest nor is it any accretion to it.
In this case, it is the generation of further income which is taxable in the
subject assessment year when the variation in foreign exchange has resulted in
further income in India

iv) Thus,
differential amount arising on account of exchange fluctuation was an extra
income which would be subject to tax in the year in which it was received.”

10 Section 142(2A) – Special audit – Direction for special audit without application of mind – Objection of assessee not considered – Order for special audit not valid

1.      
(2018) 401 ITR 74 (Kar)

Karnataka
Industrial Area Development Board vs. ACIT

A.Ys.:
2013-14 & 2014-15,

Date
of Order: 02nd January, 2018


The
petitioner is a Government of Karnataka undertaking, engaged in the activities
of development of industrial areas within the State of Karnataka. The relevant
period is A. Ys. 2013-14 and 2014-15. The petitioner is already subject to
audit at the hands of the Controller and Auditor General of India (C & AG)
as well as the independent chartered accountant, and also under the provisions
of the KIADB Act itself and had already produced these two audit reports for
the said two years before the Assessing Officer. For the relevant years, the
petitioner assessee had raised its objections for the proposal for special
audit u/s. 142(2A) of the Income-tax Act, 1961. However, without application of
mind the Assessing Officer issued directions for the special audit.  

 

The
petitioner assessee filed writ petition and challenged the said directions for
special audit. The Karnataka High Court allowed the writ petition and held as
under:

 

“i)   The purpose of section 142(2A) of the
Income-tax Act, 1961 is to get a true and fair view of the accounts produced by
the assessee so that the special audit conducted at the instance of the Revenue
may yield more revenue in the form of income-tax and it is not expected to be a
mere paper exercise or a repetitive audit exercise. Therefore, the special
circumstances must exist to direct the “special audit” u/s. 142(2A) of the Act
and such special circumstances or the special reasons must be discussed in
detail in the order u/s. 142(2A) itself.

 

ii)    It prima facie appeared that the assessing
authority had not only directed the special audit in the case of the assessee,
a Government undertaking already subject to audit at the hands of the C &
AG as well as the independent chartered accountant under the provisions of the
Act under which it was constituted, rather mechanically, but at the fag end of
the limitation period, perhaps just to buy more time to pass the assessment
order in the case of the assessee, which admittedly for the period in question
enjoyed exemption from income-tax under section 11.

 

iii)  The orders neither disclosed the discussion on the
objections of the assessee to the special audit and at least in one case for
the A. Y. 2013-14, the assessing authority did not even wait for the objections
to be placed on record and before they were furnished on 29/03/2016,he had already passed the order on 28/03/2016 while the limitation for passing the
assessment order was expiring on 31/03/2016. The orders u/s. 142(2A) could not be sustained.

9 Section 264(4) of I. T. Act, 1961 – Revision – Scope of power of Commissioner – Waiver of right to appeal by assessee – Appeals filed on similar issue for other assessment years – Not ground for rejection of application for revision – Revision petition maintainable

1.      
(2018) 400 ITR 497 (Del)

Paradigm
Geophysical Ltd. vs. CIT

A.Y.:
2012-13,  Date of Order: 13th Nov.,
2017


The
assessee was a non-resident company and a tax resident of Australia. It
provided and developed software enabled solutions and annual maintenance
services to the solutions supplied by it. For the A. Y. 2012-13, the assessee,
inter alia applied the provisions of section 44BB of the Income-tax Act, 1961
and filed its return. Pursuant to the scrutiny assessment, the Assessing
Officer issued a draft assessment order treating the receipts as royalty or fee
from technical services. No objections were filed u/s. 144C(2) of the Act, by
the assessee and therefore, no directions were issued by the DRP. Consequently,
the Assessing Officer passed a final order dated 11.05.2015, u/s. 144C(3)(b)
r.w.s. 143(3) of the Act confirming the adjustments made in the draft
assessment order. He applied the provisions of section 44DA and computed the
total income of the assessee. The assessee did not file any appeal against the
order of the Assessing Officer.


On
01.02.2016, the assessee filed a revision petition u/s. 264 of the Act, before
the Commissioner on the ground that the Assessing Officer had wrongly not
applied section 44BB and had incorrectly invoked and applied section 44DA. The
assessee submitted that for the A. Y. 2012-13, it had not availed of the remedy
of appeal and had invoked the alternative remedy under section 264. The
Commissioner declined to interfere with the order primarily on the ground that
on similar issue which arose in the A. Ys. 2011-12 and 2013-14, the assessee
had filed appeals before the appellate authority, and therefore, the revision
petition u/s. 264 for A. Y. 2012-13 was not maintainable. 

The
assessee filed writ petition and challenged the order of the Commissioner. The
Delhi High Court allowed the writ petition and held as under:

 

“i)   The Commissioner could not refuse to
entertain a revision petition filed by the assessee u/s. 264, if it was
maintainable, on the ground that a similar issue arose for consideration in
another year and was pending adjudication in appeal before another forum.

 

ii)    The time for filing appeal had expired. The
assessee had waived its right to file appeal and had not filed any appeal
against the order in question before the Commissioner (Appeals) or Tribunal.
Therefore, the negative stipulations in clause (a), (b) and (c) of section
264(4) were not attracted.

 

iii)   When a statutory right was conferred on an
assessee, it imposes an obligation on the authority. New and extraneous
conditions, not mandated and stipulated, expressly or by implication, could not
be imposed to deny recourse to a remedy and right of the assessee to have his
claim examined on merits. The Commissioner could not refuse to exercise the
statutorily conferred revisional power because the Assessing Officer was his
subordinate and under his administrative control.

 

iv)   The Commissioner while exercising power under
section 264 exercised quasi-judicial powers and he must pass a speaking and a
reasoned order. The reasoning could not be sustained for it was contrary to the
Legislative mandate of section 264.

 

v)   The matter is remanded to the
Commissioner to decide the revision petition afresh and in accordance with
law.”

 

17 Search and seizure – Presumption as to seized documents – Can be raised in favour of assessee -– Documents showing expenditure incurred on account of value addition to property – Failure by AO to conduct enquiry or investigation regarding source of investment or genuineness of expenditure – Expenditure to extent supported by documents allowable

CIT vs. Damac Holdings Pvt. Ltd. 401 ITR 495 (Ker); Date of Order: 12/12/2017:
A. Ys. 2007-08 and 2008-09:
Sections 37, 132 and 132(4A)


The two
assessee companies, D and R, were involved in the business of real estate,
purchased landed property and developed and sold it. D purchased a piece of
land for about Rs. 5 crore which he sold for about Rs. 13 crore and R purchased
property for about Rs. 4 crores and sold it for about Rs. 9 crore. Both
incurred certain expenditure on developing the land in order to make it fit for
selling. D’s transactions took place in the A. Ys. 2007-08 and 2008-09 and R’s
in A. Y. 2008-09. Assessments were initiated on the basis of searches conducted
u/s. 132 of the Income-tax Act, 1961, in the residence of the directors of both
the assessee-companies. The assessee’s claimed the deduction of the expenditure
incurred on developing the properties in order to make them fit for selling.
The claims were supported by the various documents seized from the assesses
during the searches conducted. The assesses claimed the benefit of presumption
u/s. 132(4A) of the Act. The Assessing Officer worked out the total expenditure
and apportioned it to the total area and computed the cost expended. However,
he disallowed the claim for deduction. He was of the view that the vendors of
the property had incurred and claimed expenditure for leveling the property and
hence, there was no requirement for the assesses to make the expenditure to the
extent claimed.

The
Commissioner (Appeals) allowed the claims of both assesses to the extent of the
cheque payments as disclosed from the documents seized from the premises and
disallowed the balance. The Tribunal allowed the entire expenses as claimed by
the assessee.  


On appeal
by the Revenue, the Kerala High Court held as under:


“i)   Section 132(4A) of the Income-tax Act, 1961
provides for presumption, inter alia, of contents of the books of
account and other documents found in the possession and control of any person
in the course of a search, u/s. 132, to be true, and the presumption applies
both in the case of the Department and the assessee and could be rebutted by
either.


ii)    The presumption u/s. 132(4A) applied in
favour of the assessee in so far as the expenditure being supported by the documents
seized at the time of search was concerned. There was no need for further proof
u/s. 37, since the Assessing Officer did not endeavour to carry out an enquiry
and investigation into the source of investment or the genuineness of the
expenditure made. However, the presumption could have effect only to the extent
of the documents seized and nothing further.


iii)   There was no basis for the Assessing
Officer’s computation of the leveling expenditure. His finding that the vendors
of the property had spent for leveling the property and hence, there was no
requirement for the assessee to make the expenditure to the extent claimed,
could not be sustained. He had proceeded on mere conjectures and had ignored
the seized documents which contained the evidence of cheque payments and
vouchers of cash payments effected for the development of the lands. He also
did not verify the source of income for such expenditure. The fact that the
sale price was astronomical as against the purchase price raised a valid
presumption in favour of the contention of the assesses that, but for the
development of the property to a considerable extent that would not have been
possible, especially when there is no unusual spurt in the land prices during that short period.


iv)   The Commissioner (Appeals) had considered the
documents produced and had allowed the claim to the extent that there were cheque
payments, as was discernible from the documents seized. Therefore, in the teeth
of the presumption as to the truth of the documents seized, no further proof
was required u/s. 37, the Department having failed to rebut such presumption.


v)   The allowance of expenditure for leveling the
land was to be confined to the documents revealed from the seized documents,
whether it was cash or cheque payments.”

 

55 TDS – Section 194J – A. Ys. 2009-10 to 2012-13 – Fees for professional and technical services – Scope of section 194J – State Development Authority newly constituted getting its work done through another existing unit – Reimbursement of expenses by State Development Authority – Not payment of fees – Tax not deductible at source

Princ. CIT vs. H. P. Bus Stand Management and Development Authority; 400 ITR 451 (HP):

The assessee, the H. P. Bus Stand Management and Development Authority, an entity established for development and management of bus stands within the State of Himachal Pradesh, was established w.e.f. April 1, 2000. Prior thereto, such work was being carried out by the State Road Transport Corporation itself. Since the assesee had no independent establishment and infrastructure of its own to carry out the objects, a decision was taken to have the same executed through the employees of the Corporation. This arrangement was to continue till such time as the assessee developed its own infrastructure. Since ongoing projects were required to be executed, which was so done in public interest, as per the arrangement arrived at, certain payments were released by the assessee in favour of the Corporation. The expenditure was to be shared by way of reimbursement. Since the assesee did not deduct any amount in terms of section 194J of the Act, with respect to the amount paid to the Corporation, the Assessing Officer disallowed the deduction of the amount paid to the Corporation for failure to deduct tax at source. The Commissioner (Appeal) and the Tribunal deleted the addition.

On appeal by the
Revenue, the Himachal Pradesh High Court upheld the decision of the Tribunal
and held as under:

 

“i) The
arrangement arrived at between the two entities could not be said to be that of
rendering professional services. No legal, medical, engineering, architectural
consultancy, technical consultancy, accountancy, nature of interior decoration
or development was to be rendered by the Corporation. Similarly, no service,
which could be termed to be technical service, was provided by the corporation
to the Development Authority, so also no managerial, technical or consultancy
services were provided.

ii) The arrangement was
simple. The staff of the corporation was to carry out the work of development and management of the
Development Authority till such time as, the assessee developed its
infrastructure and the expenditure so incurred by the Corporation was to be
apportioned on agreed terms. It was only pursuant to such arrangement, that the
assessee disbursed the payment to the Corporation and no amount of tax was
required to be deducted at source on the payment.” _

54 Special deduction u/s. 80-IA – A. Y. 2008-09 – Development or operation and maintenance of infrastructure facility – Scope – Deduction is profit linked – Ownership of undertaking is not important – Successor in business can claim deduction

Kanan Devan Hills Plantation Co. P. Ltd. vs. ACIT; 400 ITR 43 (Ker):

The assessee took over the going concern, a tea estate with all its incidental business. A power distribution system with a network of transmission lines was part of that acquisition. The assessee maintained that in 2007-08, it renovated and modernised the transmission lines by investing huge amounts. So for the A. Y. 2008-09, it claimed tax benefits u/s. 80-IA of the Income-tax Act, 1961. The Assessing Officer disallowed the claim for deduction u/s. 80-IA of the Act. Commissioner (Appeals) and the Tribunal upheld the disallowance.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“i)    Section 80-IA applies to an “undertaking” referred to clause (ii) or clause (iv) or clause (vi) of sub-section (4) if it fulfills the enumerated conditions. The assessee’s undertaking fell in clause (iv) of sub-section (4). In accordance with the conditions stipulated, the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. Here there was neither splitting up nor reconstructing the existing business. The assessee had produced an audited certificate that the written down value of the plant and machinery as on April 1, 2004 was Rs. 89,39,340. It claimed that it spent for the A. Y. 2008-09 Rs. 50.31 lakhs to renovate and modernise its transmission network. So, the amount spent was over 50% of the then existing establishment book value. The undertaking squarely fell u/s. 80-IA(4)(iv)(c) of the Act.

ii)    The renovation or modernisation, admittedly took place between April 1, 2004 and March 31, 2011. In the circumstances the Assessing Officer’s disallowing Rs. 58,91,000 u/s. 80-IA of the Act, as affirmed by the appellate authority and the Tribunal, could not be sustained. So we answer the question of law in the assessee’s favour. As a corollary, we set aside the Tribunal’s impugned order and allow the appeal.”

53 Reassessment – Sections 147 and 148- A. Y. 2008-09 – Notice on ground that shareholders of company were fictitious persons – Shareholders other public registered companies – Notice based on testimony of two individuals who had not been cross-examined – Notice not valid

Princ. CIT vs. Paradise Inland Shipping P. Ltd.; 400 ITR 439 (Bom):

For the A. Y. 2008-09, the assessment of the assessee company was reopened on the ground that the shareholders of the assessee – company were fictitious persons. The Commissioner (Appeals) and the Tribunal held that the reopening was not valid.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i)    The notice of reassessment had been issued on the ground that the shareholders of the assessee-company were fictitious persons. The shareholders were other companies. The documents which had been produced were basically from public offices, which maintain records of companies. The documents also included the assessment orders of such companies for the three preceding years. Besides the documents also included the registration of the companies which disclosed their registered addresses.

ii)    The Commissioner (Appeals) as well as the Tribunal on the basis of the appreciation of the evidence on record, concurrently came to the conclusion that the existence of the companies was based on documents produced from public records.

iii)    The Revenue was seeking to rely upon the statements recorded of two persons who had admittedly not been subjected to cross-examination. Hence the question of remanding the matter for re-examination of such persons would not at all be justified. The notice was not valid and had to be quashed. The appeal stands rejected.”

52 Penalty – Concealment of income – Section 271(1)(c) – A. Y. 2009-10 – Claim for deduction – Difference of opinion among High Courts regarding admissibility of claim – Particulars regarding claim furnished – No concealment of income – Penalty cannot be levied

Principal CIT vs. Manzoor Ahmed Walvir; 400 ITR 89 (J&K):
 
For the A. Y. 2009-10, the assessee had made a claim and had disclosed the relevant facts. The claim involved the interpretation of section 40(a)(ia) of the Act, and in particular the word “payable. There were different judgments of the High Courts both in favour of the assessee and against the assessee. The claim was disallowed by the Assessing Officer. On that basis, the Assessing Officer also imposed penalty u/s. 271(1)(c) of the Act for concealment of income. The Tribunal deleted the penalty.

On appeal by the Revenue, the Jammu and Kashmir High Court upheld the decision of the Tribunal and held as under:

“i)    There had been disallowance by interpreting the word “payable” in section 40(a)(ia) to include payments made during the year. Some High Courts had taken the view that the expression “payable” did not include amounts paid, while others had taken the view that the expression “payable” included amounts paid during the year. The Supreme Court finally resolved the controversy in Palam Gas Services vs. CIT; 394 ITR 300 (SC) holding that the expression “payable” included not only the amounts which remained payable at the end of the year, but also the amounts paid during the year.

ii)    When the assessee made the claim, this issue was debatable and, therefore, in so far as the deduction of tax at source on amounts paid was concerned, the position was that, while it could be made the subject of disallowance, it could not form the basis for imposing a penalty. The deletion of penalty by the Tribunal was justified.”

51 Loss – Carry forward and set off – Section 72(1) – A. Y. 2005-06 – Loss of current year and carried forward loss of earlier year from non-speculative business can be set off against profit of speculative business of current year

CIT vs. Ramshree Steels Pvt. Ltd.; 400 ITR 61 (All)

The assessee filed Nil return for A. Y. 2005-06, after setting off loss of the earlier year to the extent of profit. The Assessing Officer computed the total income at Rs. 2,17,46,490, treating the share trading business as speculative profit to an amount of Rs. 3,84,09,932. The Commissioner (Appeals) enhanced the income and held that the amount of Rs. 3,84,09,932 was to be taxed and the business loss of Rs. 1,66,63,443 was to be carried forward after verification by the assessing authority. The Tribunal allowed the assessee’s appeal and directed the Assessing Officer to allow the set off of loss from non-speculative business against profit from speculative business.

On appeal by the Revenue, the Department contended that section 72(1) provided that the non-speculative business loss could be set off against “profit and gains, if any, of any business or profession” carried on by the assessee and was assessable in that assessment year, and when it could not be so set off, it should be carried forward to the following assessment year.

The Allahabad High Court upheld the decision of the Tribunal and held as under:

“The order of the Tribunal, based on material facts and supported by the decisions of Supreme Court and the High Court, need not be interfered with. The appeal filed by the Department is accordingly dismissed.”

50 Recovery of Tax – Company in liquidation – Liabilities of directors – Section 179 – A. Ys. 2006-07 to 2011-12 – Assessee was a director of private limited company – She filed instant writ petition contending that order passed against her u/s. 179(1) was without jurisdiction because no effort was made by revenue to recover tax dues from defaulting private limited company – Held: Assessing Officer can exercise jurisdiction u/s. 179(1) against assessee only when it fails to recover its dues from Private Limited Company, in which assessee is a director – Such jurisdictional requirement cannot be said to be satisfied by a mere statement in impugned order that recovery proceedings had been conducted against defaulting private limited company – Since, in instant case, show cause notice u/s. 179(1) did not indicate or give any particulars in respect of steps taken by department to recover tax dues from defaulting private limited company, impugned order was to be set aside

Madhavi Kerkar vs. ACIT; [2018] 90 taxmann.com 55 (Bom)

The assessee was a director of private limited company. The Assessing Officer passed an order u/s. 179(1) against her for recovery of the tax dues of the company from her. She filed a writ petition challenging the validity of the said order u/s. 179(1). According to the assessee, in terms of section 179(1) the revenue was clothed with jurisdiction to proceed against directors of a private limited company to recover its dues only where the tax dues of the Private Limited Company could not be recovered from it. It was the case of the assessee that no effort was made to recover the tax dues from the defaulting private limited company.

The Bombay High Court allowed the writ petition and held as under:

“i)    The revenue would acquire/get jurisdiction to proceed against the directors of the delinquent Private Limited Company only after it has failed to recover its dues from the Private Limited Company, in which the assessee is a director. This is a condition precedent for the Assessing Officer to exercise jurisdiction u/s. 179 (1) against the director of the delinquent company. The jurisdictional requirement cannot be said to be satisfied by a mere statement in the impugned order that the recovery proceedings had been conducted against the defaulting Private Limited Company but it had failed to recover its dues. The above statement should be supported by mentioning briefly the types of efforts made and its results.

ii)    Therefore, appropriately, the notice to show cause issued u/s. 179 (1) to the directors of the delinquent Private Limited Company must indicate albeit, briefly, the steps taken to recover the tax dues and its failure. In cases where the notice does not indicate the same and the assessee raises the objection of jurisdiction on the above account, then the assessee must be informed of the basis of the Assessing Officer exercising jurisdiction and the notice’/directors response, if any, should be considered in the order passed u/s. 179 (1) of the Act.

iii)    In this case the show-cause notice u/s. 179 (1) did not indicate or give any particulars in respect of the steps taken by the department to recover the tax dues of the defaulting Private Limited Company and its failure. The assessee in response to the above notice, questioned the jurisdiction of the revenue to issue the notice u/s. 179 (1) and sought details of the steps taken by the department to recover tax dues from the defaulting Private Limited Company. In fact, in its reply, the assessee pointed out that the defaulting company had assets of over Rs.100 crore.

iv)    Admittedly, in this case no particulars of steps taken to recover the dues from the defaulting company were communicated to the assessee nor indicated in the impugned order. In this case except a statement that recovery proceedings against the defaulting assessee had failed, no particulars of the same are indicated, so as to enable the assessee to object to it on facts. In the above view, the impugned order is set aside.”

49 Income – Expenditure – Sections 2(24) and 36(1)(v) : A. Ys. 2002-03 and 2003-04 – Grant received from Government – Assessee a sick unit, receiving grant for disbursement of voluntary retirement payments – Grant received by assessee from Government cannot be treated as income – Payment to employees towards voluntary retirement scheme from grant allowable as deduction – Payment of gratuity from fund granted by Government is deductible u/s. 36(1)(v)

Scooters India Ltd. vs. CIT; 399 ITR 559 (All):

The assessee, a company owned by the Government of India, manufactured and marketed three wheelers. The assessee was a sick unit and was implementing revival or rehabilitation approved by the Board for Industrial and Financial Reconstruction. The Government of India remitted a grant out of the national renewal fund for implementation of a voluntary retirement scheme. Payment was made by the assessee to the employees towards the voluntary retirement scheme out of the grant. For the A. Y. 2002-03, the assessee furnished the return showing income at Rs. 2,51,25,472 for the current year and setting off part of brought forward losses against the income. The Assessing Officer treated the grant as income of the assessee and disallowed the expenditure incurred by it on voluntary retirement scheme and also disallowed gratuity. The Commissioner (Appeals) and the Tribunal confirmed this.  

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i)    The grant or subsidy was forwarded by the Government of India to help the assessee in its revival by making payment to employees towards voluntary retirement scheme. It was a voluntary remittance fund by the Government of India to the assessee. The Department failed to show anything so as to bring “grant” or “subsidy” it within any particular clause of section 2(24) of the Act. The amount of grant received by the assessee from the Government of India could not be treated as income.

ii)    The payment to employees towards voluntary retirement scheme was to be allowed. The narrow interpretation straining language of section 36(1)(v) of the Act so as to deny deduction to the assessee should not be followed since the objective of the fund was achieved. The payment of gratuity was to be allowed.”

48 Export business – Special deduction u/s. 10B – A. Y. 2008-09 – Gains derived from fluctuation in foreign exchange rate – Receipt on account of export – Is in nature of income from export – Entitled to deduction u/s. 10B

Princ. CIT vs. Asahi Songwon Colors Ltd.; 400 ITR 138 (Guj):

For the A. Y. 2008-09, the Assessing Officer disallowed the deduction u/s. 10B of the Act, on profits arising due to the foreign exchange rate fluctuation on the ground that it was not income derived from the Industrial undertaking. The Commissioner (Appeals) deleted the disallowance and the deletion was confirmed by the Tribunal.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i)    The income or loss due to fluctuation in the exchange rate of foreign currency that arose out of the export business of the assessee did not lose the character of income from assessee’s export business. Deduction u/s. 10B was permissible if profit and gains were derived from export. The exact remittance in connection with such export depended on the precise exchange rate at the time when the amount was remitted.

ii)    The receipt was on account of the export made, and therefore, the fluctuation thereof must also be said to have arisen out of the export business. Merely because of fluctuation in the international currencies, the income did not get divested of the character of income from export business.
iii)    Therefore, the Tribunal did not commit any error in deleting the addition made on account of fluctuation in foreign exchange rates from the deduction u/s. 10B. No question of law arose.”

36. Section 144C and CBDT Circulars No. 5 of 2010 dated 03/06/2010 and Circular No. 9 of 2013 dated 19/11/2013- International transactions – A. Y. 2009-10 – Transfer pricing – Arm’s length price – Assessment order – Procedure to be followed – Issuance of draft assessment orders by AO mandatory – Failure to do so – Not mere procedural error – Failure makes assessment order invalid – Circular clarifying that requirement u/s. 144C applies to all orders passed after 01/10/2009 irrespective of A. Y. – Department not entitled to rely on earlier circular saying provision applicable for A. Y. 2010-11 onwards

CIT vs. C-Sam (India) Pvt. Ltd.; 398 ITR 182 (Guj):

 

For the A. Y. 2009-10, upon a scrutiny
assessment and applying transfer pricing on account of assessee’s international
transactions with associated persons against the nil returned income, the
Assessing Officer computed the assessee’s income at Rs. 2.86 crores making
various additions and deletions according to the order of the Transfer Pricing
Officer (TPO). In appeal before the Commissioner (Appeals) the assessee
challenged the validity of the assessment order and the additions on the ground
that the procedure laid down u/s. 144C of the Income-tax Act, 1961, was not
followed by the Assessing Officer. The Commissioner (Appeal) allowed the
assessee’s claim and quashed the assessment order passed u/s. 143(3) of the Act
without complying with the requirement of section 144C(1) of the Act. The
Tribunal dismissed the Department’s appeal and confirmed the order of the
Commissioner (Appeal).

 

On appeal by the Revenue, The Gujarat High
Court upheld the decision of the Tribunal and held as under:

 

“i)   The
procedure laid down in section 144C of the Act, is mandatory. Before the
Assessing Officer can make variations in the returned income of an eligible
assessee, section 144C(1) lays down the procedure to be followed
notwithstanding anything to the contrary contained in the Act. This non
obstante clause thus gives an overriding effect to the procedure. When an
Assessing Officer proposes to make variations in the returned income declared
by an eligible assessee he has to first pass a draft order, provide a copy
thereof to the assessee and only thereupon the assessee could exercise his
valuable right to raise objections before the Dispute Resolution Panel (DRP) on
any of the proposed variations. In addition to giving such opportunity to an
assessee, the decision of the DRP is made binding on the Assessing Officer. It
is therefore not possible to say that such requirement is merely procedural.
The requirement is mandatory and gives substantive rights to the assessee to
object to any additions before they are made and such objections have to be
considered not by the Assessing Officer but by the DRP. The legislative desire
is to give an important opportunity to an assessee who is likely to be
subjected to upward revision of income on the basis of transfer pricing
mechanism. Such opportunity cannot be taken away by treating it purely
procedural in nature.

ii)   Circular dated June 3,
2010 was an explanatory circular issued by the Finance Ministry in which it was
provided that the amendments (which include section 144C of the Act) are made
applicable w.e.f. October 1, 2009 and will accordingly apply in relation to A.
Y. 2010-11 and subsequent years. In the clarificatory circular dated November
19, 2013, it was provided that section 144C would apply to any order which is
being passed after October 1, 2009 irrespective of the assessment year. The
latter circular clarified what all along was the correct position in law.
Section 144C(1) itself in no uncertain terms provides that the Assessing
Officer shall forward a draft order to the eligible assessee, if he proposes to
make any variation in the income or loss which is prejudicial to the interest
of the assessee on or after October 1, 2009. The statute was thus clear,
permitted no ambiguity and required a procedure to be followed in case of any
variation which the Assessing Officer proposed to make after October 1, 2009.
The earlier circular dated June 3, 2010 did not lay down the correct criteria
in this regard.

iii)   The upward revision was
made in the income of the assessee on the basis of the order of the TPO and was
done without following the mandatory procedure laid down u/s. 144C. When the
statute permitted no ambiguity and required the procedure to be followed in
case of any variation which the Assessing Officer proposed to make after
October 1, 2009 the assessee could not be made to suffer on account of any
inadvertent error which ran contrary to the statutory provisions.

iv)  No question of law arises.
Tax appeal is therefore dismissed.”

 

35. Sections 144C(1), 156 and 271(1)(c) – International transactions – A. Ys. 2007-08 and 2008-09 – Transfer pricing – Arm’s length price – Scope of section 144C(1) – Issuance of draft assessment orders by AO mandatory – Condition not fulfilled – Assessment orders, consequent demand notices and penalty proceedings invalid

Turner International India Pvt. Ltd. vs.
Dy. CIT; 398 ITR 177 (Del):

 

The assessee was a wholly owned subsidiary
of T engaged in the business of sub-distribution of distribution rights and
sale of advertisement inventory on satellite delivered channels. For A. Ys.
2007-08 and 2008-09, the Assessing Officer made a reference u/s. 92CA of the
Act, to the Transfer Pricing Officer (TPO) who passed separate orders in
respect of the distribution activity segment. On that basis, the Assessing
Officer passed orders. The Dispute Resolution Panel (DRP) concurred with the
orders of the TPO and the final orders were passed by the Assessing Officer.
The Tribunal held that neither the assessee nor the TPO had considered the
appropriate comparables and therefore, the determination of the arm’s length
price (ALP) was not justifiable. It set aside the orders of the DRP and
remanded the matter to the Assessing Officer for undertaking a transfer pricing
study afresh and accordingly make the assessments. The TPO issued fresh notices
u/s. 92CA(2) and passed separate orders proposing upward adjustments.
Subsequently, the Assessing Officer passed orders in respect of both assessment
years confirming the additions proposed by the TPO. He also issued demand
notices u/s. 156 and notices u/s. 271(1)(c) initiating penalty proceedings.

 

The assessee filed writ petitions and
challenged the assessment orders, demand notices u/s. 156 and the notices u/s.
271(1)(c). The assessee contended that there was non-compliance with the
provisions of section 144C(1) which required the Assessing Officer to first
issue draft assessment orders.

 

The Delhi High Court allowed the writ
petitions and held as under:

“i)   The legal position is
unambiguous. The failure by the Assessing Officer to adhere to the mandatory
requirement of section 144C(1) and first pass draft assessment orders would
result in invalidation of the final assessment orders and the consequent demand
notices and penalty proceedings.

ii)   The final assessment
orders dated 31/03/2015 passed by the Assessing Officer for the A. Ys. 2007-08
and 2008-09, the consequent demand notices issued by the Assessing Officer and
the initiation of penalty proceedings are hereby set aside.”

8 Sections 69B and 147 – Reassessment – Undisclosed investment – Where as per rule 11UA, value of shares was less than Rs. 5, but assessee purchased same at Rs. 10 per share and disclosed all facts in return, reassessment notice for valuing these shares at Rs. 35 as per valuation by Government valuer was not justified

[2018] 90 taxmann.com 284 (Bom)
Shahrukh Khan vs. DCIT
A.Y.: 2010-11, Date of Order: 08th Feb., 2018

In the A. Y. 2010-11, the assessee had purchased 1,10,00,000 shares at the rate of Rs. 10 per share. The Assessing Officer received information that Government valuer has determined fair market value of the said shares at Rs. 33.35/- per share. Therefore, on the basis of the said information, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 on the reason to believe that 1,10,00,00 shares were purchased at an undervaluation of Rs. 25.69 crores. Objections filed by the assessee were rejected.

The assessee filed writ petition challenging the reassessment proceedings. The Bombay High Court admitted the writ petition and held as under:

“i)    The assessment order itself mentions that the value of shares is less than Rs. 5 per share on application of Rule 11UA of the Income-tax Rules. There was a complete disclosure of all facts during regular assessment proceedings. Prima facie, the order disposing of the objections, while dealing with the objection of no reason to believe that income has escaped assessment on application of section 56(2)(vii), has completely ignored the Explanation thereto. The Explanation to section 56(2)(vii) states that the fair market value is to be determined in accordance with the Income-tax Rules. On application of Rule 11UA of the Income Tax Rules, the value per share came to less than Rs. 5 per share.

ii)    In the circumstances, the impugned notice indicates a change of opinion, as this very issue namely – valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides, on the application of method of valuation as mandated by the Explanation to section 56(2)(vii), prima facie, the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment.

iii)    In the above view, prima facie, the impugned notice is without jurisdiction. Accordingly, there shall be interim relief in terms of prayer clause (d).”

34. Section 37- Income – Charge of tax – Commission – Business expenditure – A. Ys. 1997-98 and 1998-99 – Assessee receiving 95% of payments against invoices after deduction of commission of 5%. – Finding of fact by Tribunal – Liability to tax only actual receipts

CIT vs. Olam Exports (India) Ltd.; 398 ITR 397 (Ker):

 

For the A. Ys.
1997-98 and 1998-99, the assessee claimed dediction u/s. 37 of the Act, of the
amounts payed towards commission to a concern, LE, for consignment sales. The
Assessing Officer disallowed the claim on the ground that the existence of such
an agent itself was in doubt. The Tribunal found that the evidence indicated
that the assessee had received only 95% of the invoice price and held that the
assessee could not have been taxed for the income which the assessee had not
received.

 

On appeal by the Revenue, the Kerala High
Court upheld the decision of the Tribunal and held as under:

 

“i)   The assessee could only
be taxed for the income that it had derived. There were transactions between
the assessee and LE and the invoices which were raised by the assessee in the
name of the agent contained the gross sale prices and the net amount payable
after recovery of 5% towards commission and other expenses due. Based on such
transactions, the amounts were realised by the assessee through banks and the F
form under the Central Sales Tax Act, 1956 were also obtained from the agent.

ii)   Those admitted facts,
therefore, showed that the assessee had received only 95% of the gross price
and the Department had no material before it to show that the assessee had
received anything in excess thereof, either directly or otherwise. If that was
so, despite the contentions raised by the Department regarding the doubtful
existence of the agent, the assessee having received only 95% of the gross
value, it could have been taxed only for what it had actually received.

iii)   Therefore, the Tribunal
was justified in coming to the factual conclusion that the assessee could not
have been taxed for anything more than what it had received. No question of law
arose.”

7 Sections 80-IA(4), 147 and 148 – Reassessment – Where AO rejected claim of assessee of deduction u/s. 80-IA(4) and, Commissioner (Appeals) allowed said claim of deduction in its entirety, thereafter AO could not reopen this very claim of deduction for disallowance u/s. 148

[2018] 91 taxmann.com 186 (Guj)
Gujarat Enviro Protection & Infrastructure Ltd. vs. DCIT
A.Y.: 2010-11, Date of Order: 19th February, 2018    

For the A. Y. 2010-11, the assessee filed return of income after claiming deduction u/s. 80-IA(4). The return of the assessee was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer examined the assessee’s claim of deduction u/s. 80-IA and disallowed the claim of deduction. On appeal, the Commissioner (Appeals) allowed the assessee’s claim.

Thereafter, the Assessing Officer issued reassessment notice u/s. 148 on grounds that on perusal of records, it was seen that the amount on which the assessee had claimed exemption u/s. 80-IA included the interest income assessable under the head ‘Income from other sources’. On verification of bifurcation of interest income, it was clear that this interest income was not derived from the infrastructure development activity of the undertaking. Hence, it was not to be considered for the purpose of deduction under section 80-IA. Thus, deduction so allowed on the interest income was not allowable. The objection filed by the assessee were rejected.

The assessee filed writ petition challenging the reopening. The Gujarat High Court allowed the writ petition and held as under:

“i)    The assessee’s reply to the Assessing Officer would show that out of the total interest income, the assessee had attributed a sum of certain amount as business income. It is this claim of the assessee of the interest income of certain amount, as being part of its business income which is a focal point of the reasons recorded by the Assessing Officer for reopening the assessment. He contends that the interest income cannot be treated as arising out of the assessee’s business, and therefore, deduction u/s. 80-IA(4) would not be allowable. However, this is for later. For the present, one may record that the Assessing Officer passed an order of assessment in which he rejected the assessee’s claim of deduction under section 80-IA. He therefore had no occasion to separately comment on the assessee’s claim of interest income being eligible for such deduction. Be that as it may, the assessee carried entire issue in appeal before the Commissioner. The Commissioner (Appeals) by his order, allowed the assessee’s claim of deduction u/s. 80-IA in toto. Record is not clear whether the revenue has carried the order of Commissioner (Appeals) before the Tribunal or not. However, this by itself may not be a determinative factor.

ii)    At that stage, after the Commissioner allowed the assessee’s appeal, the Assessing Officer issued the instant reassessment notice. Since the notice was issued beyond the period of four years from the end of relevant assessment year, the requirement of the assessee to make true and full disclosure, and the failure to make such disclosures leading to income chargeable to take escaping the assessment becomes crucial. In this context, the record would show that the crucial requirement arising out of the proviso to section 147 is not satisfied. The Assessing Officer has, in fact, in the reasons recorded itself proceeded on the basis of ‘on verification of record’. Thus, clearly the Assessing Officer proceeded on the basis of disclosures forming part of the original assessment. Even otherwise, as noted, during the original assessment, the Assessing Officer had called upon the assessee to clarify on the interest income which include the assessee’s claim of certain amount as business income and, therefore, eligible for deduction u/s. 80-IA(4). There was no failure on the part of the assessee to disclose fully and truly all relevant facts.

iii)    There is yet another and equally strong reason to quash the impugned notice. Before elaborating on this, it is recorded that the assessee’s contention of possible change of opinion cannot be accepted. The Assessing Officer had rejected entire claim of deduction u/s. 80-IA(4). He, therefore, had no occasion to thereafter comment on a part of such claim relatable to the assessee’s interest income. Had the Assessing Officer accepted in principle the assessee’s claim of deduction under section 80-IA(4) and thereafter, after scrutiny not made any disallowance for interest income forming part of such larger claim, the principle of change of opinion would apply. In the present case, once the Assessing Officer rejected the claim of deduction u/s. 80-IA(4) in its entirety, there was thereafter no occasion and any need for him to dissect such claim for rejection on some additional ground.

iv)    The second reason which it is referred to is of merger. The Assessing Officer having rejected the claim of deduction u/s. 80-IA(4), the issue may be recalled was carried in appeal by the assessee and the Commissioner (Appeals) allowed the claim in its entirety. It would thereafter be not open for the Assessing Officer to reopen this very claim for possible disallowance of part thereof. When the Commissioner (Appeals) was examining the assessee’s grievance against the order of Assessing Officer disallowing the claim, it was open for the revenue to point out to the Commissioner (Appeals) that even if in principle the claim is allowed, a part thereof would not stand the scrutiny of law. It was open for the Commissioner to examine such an issue, even suo motu. If one allow the claim in its entirety, the Assessing Officer thereafter cannot re-visit such a claim and seek to disallow part thereof. This would be contrary to the principle of merger statutorily provided and judicially recognised. Even after the Commissioner (Appeals) allow such a claim and the revenue was of the opinion that he has not processed it and committed an error, it was always open for the revenue to carry the matter in appeal. At any rate, reopening of the assessment would simply not be permissible. Reassessment carried an entirely different connotation. Once an assessment is reopened, the same gives wider jurisdiction to the Assessing Officer to examine the claims which had been formed part of the reasons recorded, but which were not originally concluded.

v)    In the result, impugned notice is quashed. Petition is allowed and disposed of accordingly.”

6 Section 43(6) – Depreciation – WDV – While computing written down value u/s. 43(6) for claiming depreciation, depreciation allowed under State enactment cannot be reduced

[2018] 90 taxmann.com 420 (Ker)
Rehabilitation Plantations Ltd. vs. CIT
A.Y.: 2002-03, Date of Order: 29th Jan., 2018

The assessee was engaged in the business of manufacture and sale of centrigued latex and rubber. For the A. Y. 2002-03, it claimed depreciation of the entire cost of the plant and machinery to the extent of 35 per cent treating it as the actual cost allowable on which the allowable deduction for depreciation is computed. The Assessing Officer found that the depreciation on assets used in the plantations, including for manufacturing activity, was found to have been claimed by the assessee-company for more than two decades. It was found that earlier the assessments had not been taken under the Income-tax Act, 1961, since the entire income was assessable under the Kerala Agricultural Income-tax Act, 1991 (AIT Act). It was found that as per section 32(1) of the IT Act, depreciation on building, machinery, etc. is to be allowed on the written down value of the assets, owned by the assessee and used for the purposes of the business. The written down value of the assets as per section 43(6) is the actual cost when the assets were acquired before the previous year. Otherwise the written down value shall be the actual cost of the assets less all depreciation actually allowed under the IT Act. The assessee had been claiming depreciation in computing the income from plantations, and if the actual cost of the assets is adopted it would lead to the assessee getting a double benefit on the same component of cost, to the extent of 35 per cent. Hence, the written down value for the previous year was only permissible to be claimed as depreciation, was the specific ground on which such claim was rejected. The Assessing Officer allowed depreciation on written down value after reducing the depreciation claimed under AIT Act from the actual cost.

The Tribunal held that there could be no claim for the assessee over and above the written down value as per the books of account and upheld the decision of the Assessing Officer.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“i)    It is seen from the report filed by the Assessing Officer under the AIT Act that the assessee has claimed depreciation in the earlier years when filing returns under the AIT Act. The report of the Assessing Officer under the IT Act also indicates that the assets pertaining to the agricultural income has not been projected for depreciation under the IT Act for the previous years. The Assessing Officer points out that depreciation was claimed in the years 1998-99 to 2001-02 with respect to the building and plant & machinery of rubber sheeting factory, the income derived from which, being a manufacturing activity, however is not covered under the AIT Act. In such circumstances, one has to look at whether in allowing the depreciation on the basis of the written down value as available in section 43(6)(b), the entire cost of the building and plant and machinery for the purpose of generation of agricultural income has to be allowed or not.

ii)    There need not be any controversy raised on the interpretation of the provision of section 43(6) at sub-clause (b). What can be reduced from the actual cost to the assessee is all depreciation actually allowed under the IT Act, 1961 or the IT Act, 1922 or any Act repealed by that Act or any executive orders issued when the Indian Income-tax Act, 1886 was in force. The AIT Act having not been specifically noticed and the depreciation allowed with respect to the income assessed to tax under any other enactments having not been excluded, there is no reason for this Court to come to a different finding as to the written down value which could be claimed as depreciation on the first year in which the assessee is assessed under the IT Act. The assessee was earlier assessed under the IT Act, but for its manufacturing activity and not its agricultural operations, the income from which was assessed under the AIT Act. The assets employed for agricultural operations were never accounted for computing the depreciation under the IT Act, since that income, prior to rule 7A, was not exigible to tax under the IT Act.

iii)    The question arise since the entire income generated from the agricultural income was assessable to tax under the AIT Act, a State enactment. Only in the relevant assessment year i.e. 2002-03, the provision for a separate assessment under the AIT Act and IT Act came into force by virtue of the Income-tax Rules. Income from the manufacture of rubber which was earlier treated as agricultural income was made assessable under the IT Act to the extent of 35 per cent of the income derived from the business. Hence, the assessee would be entitled to claim only 35 per cent of the depreciation for the relevant assessment year. However, in computing such depreciation, should one adopt the entire cost of the plant and machinery or that shown as the written down value after reducing the depreciation allowed under the AIT Act, is the vexing question.

iv)    As noticed, the deeming provision is very clear and there is nothing to exclude from the computation of the cost of the assets; the depreciation allowed under the AIT Act. The revenue would contend that this Court has ample powers to iron out the creases and avoid a double benefit being conferred on the assessee. There is no doubt of such powers, but, whether it could be exercised in the present case is the question. In ironing out creases one should not be accused of burning the cloth, by adding words into the statute to digress from the essential unambiguous intention.

v)    The rule providing division of income to be assessed respectively under the AIT Act and the IT Act was brought in the year 2002. The Government was quite aware of the provision available in the IT Act, 1961 by which the depreciation in cases, where it was not being claimed under the enactments as specified in section 43(6)(b), can only be excluded and otherwise the written down value has to be deemed to be the cost of the assets. On apportioning the income from agriculture to be assessed under the respective enactments of the State and the Union; amendments ought to have been brought in accordingly to ensure that no double benefit accrues on an assessee.

vi)    Such amendments were brought in with prospective effect as is seen from Explanation 7 to section 43(6) of the IT Act which got inserted by the Finance Act, 2009 with effect from 1-4-2010. The Explanation takes in the specific defect of double benefit being conferred on the assessee. The legislature thought it fit to give it effect from 1-4-2010. The assessment year herein is 2002-03 relating to the income of the previous year being 2001-02. The amendment does not apply to that year. The amendment brought in without any retrospective effect, further makes it clear that the legislature cured the defect, but however, did not do so for the years previous to the amendment and not for the relevant assessment year. This is not a situation in which casus omissus could be supplied.

vii)    On the above reasoning, the disallowance of the depreciation and the computation made of the written down value cannot be accepted. The Assessing Officer is directed to employ the deeming provision for computing the written down value de hors the depreciation granted under the AIT Act and take 35 per cent of the cost of the total assets as written down value, allowing the depreciation for the relevant assessment year to that extent. The Assessing Officer shall deem the written down value to be the cost of the assets and compute the depreciation allowable at 35 per cent of such deemed written down value and apply it to the portion of the income derived from the agricultural business, that is assessable under the IT Act. The appeal is allowed with the above observations.”

5 Section 32(2) – Unabsorbed depreciation – Law applicable – Effect of amendment to section 32(2) by Finance Act, 2001 – Removal of restriction of eight years for carry forward and set off – Unabsorbed depreciation or part thereof not claimed till relevant year – Carry forward and set off permitted

(2018) 400 ITR 569 (Delhi)
Principal CIT vs. British Motor Car Co. (1934) Ltd.
A.Y.: 2010-11, Date of Order: 09th January, 2018

The relevant period is the
A. Y. 2010-11. The assessee had the accumulated carried forward depreciation
u/s. 32(2) of the Income-tax Act, 1961 starting from the A. Y. 1998-99. In the
A. Y. 2010-11, the assessee claimed set off of the carried forward
depreciation. The Assessing Officer disallowed the claim in respect of amounts
carried forward from the years prior to A. Y. 2002-03 on the ground that the
amendment to section 32(2) of the Act, which removed of eight years limit, was
prospective and effective only from 01/04/2002.

 

The Commissioner (Appeals)
reversed the order and his decision was upheld by the Tribunal.

 

In
appeal by the Revenue, on the question whether section 32(2) as amended by the
Finance Act, 2001, w.e.f. 01/04/2002 could be given effect beyond the period of
eight years prior to its commencement, the Delhi High Court upheld the decision
of the Tribunal and held as under:

 

“i)   The rationale for the amendment of section
32(2) the restriction against set off and carry forward limited to eight years,
beyond which the benefit could not be claimed under the provisions of the 1961
Act, was for the reasons deemed appropriate by Parliament.

ii)    The limit was imposed in the year 1996
through the Finance (No. 2) Act, 1996. Had the intention of Parliament been
really to restrict the benefit, of unlimited carry forward prospectively, there
were more decisive ways of doing so, such as, an express provision or an
exception or proviso. The absence of any such legislative device meant that the
provision had to be construed in its own terms and not so as to restrict the
benefit or advantage it sought to conform. No question of law arose.”

 

4 Section 54EC – Exemption of Capital gain – Time of six months from date of transfer for investment – Transfer effected only on transfer of physical possession of property and not on date of execution of development agreement – Investment made by assessee falling within time specified u/s. 54EC

(2018) 401 ITR 96 (Bom)
CIT vs. Dr. Arvind S. Phake
A.Y. 2008-09, Date of Order: 20th Nov., 2017

The assessee entered into a
registered development agreement dated 23/09/2017 in respect of certain
property. The total consideration agreed was Rs. 5,32,00,000/. Physical
possession was given on 01/03/2008. For the A. Y. 2008-09, a return was filed
by the assessee declaring his income on account of long term capital gain on
sale of the immovable property. The assessee claimed exemption u/s. 54EC of the
Income-tax Act, 1961 in respect of investment of Rs. 50,00,000/- in bonds of
the NHAI made on 28/03/2008 and Rs. 50,00,000/- in bonds of RECL on 22/08/2008.
The Assessing Officer held that the investment of the bonds of NHAI was within
the period specified u/s. 54EC of the Act and the investment of Rs. 50,00,000/-
in the bonds of RECL was beyond the period provided in section 54EC in as much
as the investment made on 22/08/2008 was not within six months from the date of
transfer of assets.

The Tribunal found that on
the date of execution of the development agreement, i.e., on 13/09/2007, full
consideration was admittedly not paid, and therefore the transfer was not
effected on 13/09/2017. Therefore, taking the date of transfer as 01/03/2008 on
which date physical possession of the property was delivered, the investment made
on 22/08/2008 was well within the time specified under section 54EC of the Act.
The Tribunal, accordingly allowed the assessee’s claim.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal considered
various clauses in the development agreement. Sub clause (d) of clause (3) of
the agreement provided that after full payment of consideration, the
construction would be undertaken by the developer. Admittedly, on the date of
execution of the development agreement, the entire consideration was not
received by the assessee.

ii)    Physical possession of the property, the
subject matter of development agreement was parted with by the assessee on
01/03/2008. It was on that day that complete control over the property was
passed on to the developer.

iii)   After having perused the various clauses in
the agreement and the factual aspects, the Tribunal rightly took 01/03/2008 as
the date of transfer and the investment made on 22/08/2008 was well within the
time specified u/s. 54EC of the Act. Therefore, no substantial question of law
arose.”

3 Section 14A – Business expenditure – Disallowance – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure

[2018] 91 taxmann.com 29 (Guj)
Principal CIT vs. Adani Agro (P.) Ltd.
Date of Order: 05th February, 2018

The assessee incurred administrative expenses amounting to Rs. 30 lakhs. The Assessing Officer was of the view that the assessee failed to fully disclose the expenditure for earning the exempt income and based on the format provided under rule 8D, made the disallowance to the tune of Rs. 60 lakhs.

The Tribunal noted that the entire administrative expenses of the assessee was Rs. 30 lakhs, out of which, the assessee had offered Rs. 10 lakhs i.e., 1/3rd of the total administrative expenditure for earning income covered u/s. 14A. The Tribunal was of the opinion that even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i)    Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee.

ii)    If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee’s declaration that total administrative expenses incurred by the assessee for all its activities was Rs. 30 lakhs, there was no question of disallowing administrative expenses to the tune of Rs. 60 lakhs u/s. 14A with the aid of rule 8D.”

2 Sections 40(a)(ia), 194H and 194J – Business expenditure – Disallowance – Payments subject to TDS – Compensation paid to joint venture partner under MOU – Finding that agreement not sham – Payment cannot be treated as expenditure required to deduct tax at source – Disallowance for failure to deduct tax not attracted

1.      
(2018) 400 ITR 521 (Cal)

Principal
CIT vs. Entrepreneurs (Calcutta) Pvt. Ltd.

A.Y.:
2006-07, Date of Order: 13th Sept., 
2017


For the A. Y. 2006-07, the
assessee claimed as expenditure a sum of Rs. 5,17,48,439 paid to company A, as
compensation in connection with a land transaction. The assessee’s explanation
was that the amount was paid in performance of its obligation under a
memorandum of understanding with A under which A and the assessee were to share
the profit on sale of land in the ratio of 75% to A and 25% to the assessee,
that the services to be rendered by A included identifying the buyer and also
carrying out various other tasks in respect of the sale of the landed property
involved. The Assessing Officer was of the view that A was a sham company. He
treated the entire sum of compensation paid to A as the assesee’s income
chargeable to tax, on the grounds that the transaction was a sham, and that the
assessee had not deducted tax at source on the amount, invoking the provisions
of section 40(a)(ia).

 

The Tribunal held that the
transactions were made by a valid written contract on various terms and
conditions between the parties, which were essential for a joint venture
project. Such facts were not denied nor were any defects found in the agreement
by the Assessing Officer. It further held that the transaction was in lieu of
the agreement and the Assessing Officer was not justified in treating the
payment of compensation as an expenditure and that no tax at source was
required to have been deducted on the profit so shared between the two joint
venture partners and deleted the addition.   

 

On appeal by the Revenue,
the Calcutta High Court upheld the decision of the Tribunal and held as under:

 

“i)   Whether a transaction was sham or not was a
question of fact. The Commissioner (Appeals) had found the Assessing Officer’s
conclusion that it was sham transaction between assessee and A to be in direct
conflict with the Assessing Officer’s own acceptance that the services rendered
by A were of specialised, professional and technical in nature. Upon analyzing
the memorandum of understanding and other materials on record, the Commissioner
(Appeals) had accepted the contention of the assessee that the compensation paid
was not an expenditure incurred so as to attract the provisions of sections
194H and 194J requiring tax deduction at source. As a consequence, the question
of disallowance of the payments applying the provisions of section 40(a)(ia)
could not have arisen.

 

ii)   The findings of the Commissioner (Appeals),
concurred with by the Tribunal, were based on appreciation of material on
record. Further, the Tribunal had recorded that the Assessing Officer did not
point out any defect in the “settlement/contract”. There was no perversity in
the findings of the Commissioner (Appeals) and the Tribunal. No question of law
arose.”

1 Section 143(3) – Assessment – Construction business – Estimate of cost of construction – Reference to DVO – Books of account maintained by assessee not rejected – AO cannot refer matter to DVO

(2018) 401 ITR 285 (Mad)
CIT vs. A. L. Homes
A.Y.: 2009-10, Date of Order: 20th Sept., 2017    


The assessee was in
construction business. In the course of the assessment for the relevant year,
the Assessing Officer made a reference to the District Valuation Officer (DVO)
for estimation of the cost of construction. The estimated cost of construction
by the DVO was higher than that found according to the books of account of the
assessee. The valuation report was objected to by the assessee, on the ground
that it had been maintaining regular books of account and that reference could
not have been made to the DVO without rejecting the books of account. However,
the Assessing Officer added the difference in the cost of construction, as
unaccounted investment to the income of the assessee.

 

The Commissioner (Appeals)
deleted the addition and held that the Assessing Officer could not have made a
reference to the DVO for estimation, when the books of account of the assessee
had not been rejected. He further held that the difference between the cost
shown in the books of account and the estimation by the DVO was only 6.85%,
whereas, statutorily a reference for valuation could be made only if, in the
opinion of the Assessing Officer, the difference would have exceeded 15%. The
Tribunal found that the assessee had sold the flats and that most of the
purchasers had occupied the flats and that the cost improvements made had to be
considered as income of the purchasers. It upheld the deletion made by the
Commissioner (Appeals).

 

On appeal by the Revenue,
the Madras High Court upheld the decision of the Tribunal and held as under:

 

“i)   The appellate authorities had concurrently
found that the books of account of the assessee had not been rejected by the
Assessing Officer and therefore, the matter ought not to have been referred to
the DVO for estimation of the cost of construction.

 

ii)    The reliance placed on the report of the DVO
for making the addition was misconceived. No question of law arose.”

18 TDS – Certificate for deduction at lower rate/nil rate – Cancellation of certificate – Judicial order – Recording of reasons is condition precedent – No change in facts during period between grant of certificate and order cancelling certificate – No valid or cogent reasons recorded and furnished to assessee for change – Violation of principles of natural justice – Order of cancellation quashed

Tata Teleservices (Maharashtra) Ltd. vs. Dy.
CIT; 402 ITR 384 (Bom); Date of Order:16-25/01/2018:

A.
Y. 2018-19:

Section
197; R. 28AA of ITR 1962; Art. 226 of Constitution of India


The
assessee provided telecommunication services. For the A. Ys. 2014-15 to
2016-17, it filed return declaring loss aggregating to Rs. 1330 crore and
making a claim of refund of an aggregate sum of Rs. 121 crore. In the course of
its business, the assessee received various payments for the services rendered
which were subject to tax deduction at source (TDS) under Chapter XVII of the
Income-tax Act, 1961. According to the assessee it was not liable to pay
corporate tax in the immediate future in view of the likely loss for the A. Y. 2018-19
and the carried forward losses. Therefore, it filed an application/s. 197 of
the Act for a certificate for nil/lower TDS to enable it to receive its
payments from various parties which were subject to TDS, without actual
deduction at source. On 04/05/2017, the Dy. Commissioner (TDS) issued a
certificate u/s. 197 and directed the deduction of tax at nil rate by the
various persons listed in the certificate while making payments to the assessee
u/ss. 194, 194A, 194C, 194-I, 194H and 194J. Thereafter, the Dy. Commissioner
(TDS) communicated that he was reviewing the certificate u/s. 197 which had
been issued, in respect of cases in which outstanding tax demand was pending.
Consequently, the assessee furnished the details of tax outstanding. The Dy.
Commissioner (TDS) issued a show cause notice and granted a personal hearing to
the assessee. By an order dated 23/10/2017, the certificate dated 04/05/2017
issued u/s. 197 was cancelled on the ground that any future tax payable might
not be recoverable from the assessee and that there was an outstanding tax
demand of Rs. 6.90 crore payable by the assessee.


The Bombay
High Court allowed the writ petition filed by the assessee, quashed the order
of the Dy. Commissioner (TDS) dated 23/10/2017 cancelling the certificate and
held as under:


“i)   The issuance of the certificate was the
result of an order holding that the assessee was entitled to a certificate u/s.
197. In the absence of the reasons being recorded, the certificate u/s. 197
would not be open to challenge by the Department, as it would be impossible to
state that it was erroneous and prejudicial to the Revenue. The recording of
reasons was necessary as only then it could be subject to revision by the
Commissioner u/s. 263. Therefore, there would have been reasons recorded in the
file before issuing a certificate dated 04/05/2017 and that ought to have been
furnished to the assessee before contending that the aspect of rule 28AA was
not considered at the time of granting the certificate. Further, if the Department
sought to cancel the certificate on the ground that a particular aspect had not
been considered, before taking a decision to cancel the certificate already
granted, it must have satisfied the requirement of natural justice by giving a
copy of the same to the assessee and heard the assessee on it before taking a
decision to cancel the certificate.


ii)    The notices which sought to review the
certificate did not indicate that the review was being done as the certificate
dated 04/05/2017 was granted without considering the applicability of rule 28AA
in the context of the assessee’s facts. Therefore, there was no occasion for
the assessee to seek a copy of the reasons recorded while issuing the
certificate. Moreover, it was found on facts that there was no change in the
facts that existed on 04/05/2017 and those that existed when the order dated
23/10/2017 was passed. Thus, there was a flaw in the decision-making process
which vitiated the order dated 23/10/2017. The grant or refusal to grant the
certificate u/s. 197 had to be determined by parameters laid down therein and
rule 28AA and it could not be gone beyond the provisions to decide an
application.


iii)   The order dated 23/10/2017 did not indicate,
what the profits were likely to be in the near future, which the Department
might not be able to recover as it would be more than the carried forward
losses. However, such a departure from the earlier view had to be made on valid
and cogent reasons. Therefore, on the facts, the basis of the order, that the
financial condition of the assessee was that any further tax payable might not
be recoverable, was not sustainable and rendered the order bad.


iv)   Neither section 197 nor rule 28AA provided
that no certificate of nil or lower rate of withholding tax could be granted if
any demand, however miniscule, was outstanding. Rule 28AA(2) required the
authority to determine the existing estimated liability taking into
consideration various aspects including the estimated tax payable for the
subject assessment year and also the existing liability. The existing and
estimated liability also required taking into account the demands likely to be
upheld by the appellate authorities. The assessee’s appeal with respect to the
demand of Rs. 6.68 crore was being heard by the Commissioner (Appeals) and no
order had been passed thereon till date.


v)   The order in question did not deal with the
assessee’s contention that the demand of Rs. 28 lakh was on account of mistake
in application of TRACE system nor did it deal with the assessee’s contention
that the entire demand of Rs. 6.90 crore could be adjusted against the
refundable deposit of Rs. 7.30 crore, consequent to the order dated 27/05/2016
of the Tribunal in its favour. The order dated 23/10/2017 seeking to cancel the
certificate dated 04/05/2017 was a non-speaking order as it did not consider
the assessee’s submissions. Therefore, the basis of the order cancelling the
certificate, that there was outstanding demand of Rs. 6.90 crore payable by the
assessee, was not sustainable.


vi)   In the above view, the impugned order dated
23/10/2017 is quashed and set aside.”

33. U/s. 80HHC – Export Business – Deduction – A. Y. 1996-97 – Supporting manufacturer – Application by exporter for renewal of trading house certificate pending before concerned authorities – Does not disentitle supporting manufacturer to the deduction u/s. 80HHC – Exporter gave disclaimer certificate with details of export – Supporting manufacturer entitled to benefit of deduction u/s. 80HHC(1A)

CIT vs. Arya Exports and Industries; 398 ITR 327 (Del):

 

The assessee was a supporting manufacturer
of an export trading house, R. In its return for the A. Y. 1996 97, the assessee claimed deduction u/s. 80HHC(1) on the net profit
shown in the profit and loss account. It had dispatched the supplies prior to
31/03/1995 and on various dates between 01/04/1995 to 05/06/1995 and the goods
were exported by R which had issued a disclaimer certificate on 29/08/1996. It
submitted the certificate in form 10CCAB, which was issued by the export
trading house R, confirming that no deduction u/s. 80HHC(1) had been claimed by
R in respect of the export turnover shown by the assessee. The certificate
contained the particulars which related to the supporting manufacturers and the
export trading house, also included the invoice numbers, dates of invoice,
shipping bill numbers, nature of goods with quantities, etc. R had a
trading house certificate, valid up to 31/03/1995 and had filed an application
for renewal of its trading house certificate by a receipt dated 16/10/1995, and
had not received any communication to indicate that its application for renewal
was rejecetd. The Assessing Officer held that it was obligatory on the part of
R, the export trading house, to obtain a certificate from the concerned
Government authorities and that without the renewal certificate, the claim for
deduction u/s. 80HHC by the assessee, a supporting manufacturer, was not valid
and that therefore, the exports done after 01/04/1995 were not entitled to
deduction u/s. 80HHC. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim for deduction.

 

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

 

“i)   The assessee was entitled
to the deduction u/s. 80HHC(1A) for the A. Y. 1996-97. The legislative scheme
which emanated from sub-section (1A) of section 80HHC was to treat the
supporting manufacturer and its entitlement to deduction separately from that
of the exporter. The words “assessee” used throughout s/s. (1) referred only to
the exporter whereas the same word used throughout s/s. (1A) referred to the
supporting manufacturer. There was a discernible distinction, in the
legislative scheme of section 80HHC between, the deduction that could be
claimed by an exporter and the deduction that could be claimed by a supporting
manufacturer. While the supporting manufacturer has to fulfil the condition of
a certificate having been issued by the exporter/export trading house to avail
the benefit of a deduction from the turnover that had been made available to
the supporting manufacturer, expressly u/s. 80HHC(1A), the deduction did not
hinge upon the eligibility of the exporter for the deduction u/s. 80HHC(1).
Further, a perusal of form 10CCAB showed that there was a separate certificate
to be issued in favour of the supporting manufacturer where the exporter made a
declaration that it had not claimed a deduction u/s. 80HHC(1) and there was a
counter verification by the chartered accountant of such a certificate. It was,
therefore, clear that there was no double deduction claimed in respect of the
export, which was consistent with the legislative intent of extending the
benefit u/s. 80HHC either to the exporter or to the supporting manufacturer and
not to both.

 

ii)   Even
after the period for which the renewal of the trading house certificate was
sought, R continued to be treated as an export house according to the facts
that had emerged before the Commissioner (Appeals) and the Tribunal. R filed an
application for renewal of its trading house certificate, which was pending
before the relevant authorities for four years and was pending even on the date
of the assessment order.

 

iii)   The export import policy
for the relevant period expressly stated that during the interim period the
export trading house would be eligible to claim all the facilities and benefits
of the exporter and, therefore, the further benefit of the supporting
manufacturer as well. The benefit u/s. 80HHC was, therefore, available to R for
the exports made during the period in question. However, R having issued the
disclaimer, did not, in fact, claim the deduction. The mere non-grant of the
renewal of the trading house certificate by the Director General of Foreign
Trade could not deprive the assessee as a supporting manufacturer of the
deduction it was entitled to u/s. 80HHC(1A).”

32. Sections 2(15) and 12AA – Charitable Trust – Registration – A. Y. 2012-13 – Meaning of charitable purpose – Institution for training Government officials in water and land management – Direct connection with preservation of environment – Institution entitled to registration

CIT vs. Water and Land Management
Training and Research Institute; 398 ITR 283 (T&AP):

 

The assessee is an institution established
in the year 1983, under the control of the Irrigation Department of the
Government of Andhra Pradesh. The assessee applied for registration u/s. 12AA
of the Act. The Director of Income Tax (Exemptions) observed that though the
institute was mainly functioning as a training institute for the purpose of
training Government officials in the field of water and land management, the
institute was also providing guidance to farmers and rendering consultancy
services to various organisations for a fee. With this view, the Director of
Income-tax (Exemptions) rejected the application for registration. The Tribunal
allowed the appeal and directed registration u/s. 12AA. 

 

On appeal by the Revenue, the Telangana and
Andhra Pradesh High Court upheld the decision of the Tribunal and held as
under:

 

“i)   A careful reading of the
definition of the expression “charitable purpose” appearing in section 2(15) of
the Act, 1961 would show that it is an inclusive definition. This is clear from
the usage of the word “includes”. The definition “includes” within its ambit,
(a) relief of the poor, (b) education, (c) yoga, (d) medical relief, (e)
preservation of environment including waterheads, forests and wildlife, (f)
preservation of monuments or places or objects of artistic or historic interest
and (g) the advancement of any other object of general public utility.
Interestingly, the first proviso does not deal with anyone of the first six
items. The first proviso as it stood before April 1, 2016 or even as it stands
after April 1, 2016 deals only with one of the seven items covered by the
substantive part of the definition, namely, “advancement of any other object of
general public utility”. The second proviso takes away from the ambit of the
first proviso, even an activity relating to the advancement of any other object
of general public utility, if the aggregate value of the receipts from the
activities referred to in the first proviso is 
Rs. 25 lakhs or less in the previous year.

 

ii)   It is only after an
institution is granted registration u/s. 12AA of the Act; that the examination
of the gross receipts year after year for the purpose of finding out the
eligibility for exemption would arise. This has also been clarified by the CBDT
Circular No. 21 of 2016, dated May 27, 2016.

 

iii)   Charitable purpose
includes preservation of environment including waterheads, forests and
wildlife. The activity carried out by the assessee had a direct casual
connection to the activity of preservation of environment. The Tribunal was
correct and the assessee was entitled to registration.”

41. Revision- Section 264 – A. Y. 2013-14- Power of Commissioner – Intimation u/s. 143(1) whether can be considered in revision – Assessee filing revised return and seeking interference by Commissioner – Commissioner to consider revision application

Agarwal Yuva Mandal (Kerala) vs. UOI; 395 ITR 502 (Ker):

For the A. Y. 2013-14, the assessee society filed return of
income claiming certain deductions. The assessee received an intimation u/s.
143(1) disallowing certain expenses on the ground that it was not registered
u/s. 12A of the Act, 1961. The assessee was assessed to a liability of Rs.
2,85,190-. The assessee later revised its return, but no action was taken by
the Department based on the revised return. The assessee thereafter received a
reminder for payment of the outstanding amount of Rs. 2,85,190. The assessee
sent a reply requesting consideration of its revised return. Since there was no
response, the assessee filed a revision petition u/s. 264 of the Act. The
Principal Commissioner declined to exercise the revisional authority holding
that the intimation u/s. 143(1) was not an order of assessment for the purpose
of section 264, whereas it was deemed to be a notice of demand u/s. 156 of the
Act. The assessee filed a writ petition against the order of the Principal
Commissioner.

The Kerala High Court allowed the assessee’s writ petition
and held as under:

“i)  Section 143 had undergone certain changes
w.e.f. 01/06/1999. The statute uses the word intimation and not order. It was
in the light of the change in the statutory provision that one had to consider
the scope and effect of the revisional powers u/s. 264.

ii)  Though not as a challenge to section 143(1)
notice, when the assessee filed a revised return and sought for interference by
the Commissioner, necessarily a claim had to be considered in accordance with
law. The Commissioner would be justified in considering the claim to deduction
by the assessee in accordance with law u/s. 264 of the Act. The Commissioner is
directed to consider the matter.”

40. TDS – Rent – Section 194-I – A. Y. 2010-11 – Meaning of “rent”- Passenger service fees collected by airline operators – Use of land and building incidental – Tax not deductible at source on such fees

CIT(TDS) vs. Jet Airways (India) Ltd.; 395 ITR 230 (Bom):

The assessee was engaged in the business of transportation by
aircraft and for that purpose used and occupied airports run by airport
operators. In the course of its business the assessee collected on behalf of
the airport operators, a passenger service fees and handed it over to the
airport operators.

However, as no tax was deducted at source while handing over
the passenger service fees to the airport operator, a notice u/s.
201(1)(1a)  of the Act, 1961 was issued
calling for the assessee’s explanation. The basis of the notice was that the
passenger service fees paid over to the airport operator was “rent” falling
within the scope of section 194-I of the Act. The assessee contended that the
passenger service fees collected by it from its passengers and handed over to
the airport operator is not in the nature of rent. That it consisted of two
components, i.e., security component and facilitation component.

However, the Assistant Commissioner (TDS) did not accept the
assessee’s submission and held the assessee liable to deduct and pay the amount
of tax at source and the interest thereon u/s. 201(1) and (1A). The Tribunal
held that the payment could not be considered to be rent and allowed the
assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under:

“i)  The
assessee collected passenger service fees only from its embarking passengers
for and on behalf of the airport operator. The payment of passenger service
fees was for use of secured building and furniture. Therefore, the use of land
or building in this case was only incidental. As the substance of the passenger
service fees was not for use of land or building, but for providing security
service and facilities to the embarking passengers, the payment could not be
considered to be rent within the meaning of section 194-I.

ii)  Tax
was not deductible at source on the payment. Proposed question of law does not
give rise to any substantial question of law and thus not entertained.”

31. Section 2(47) – Capital gain – Computation – Transfer – A. Y. 1995-96 – Transfer of land to developer – 44% of land transferred in exchange for 56% of built-up area – Consideration for transfer of land was cost of construction of 56% of built up area – Cost of acquisition of land was its market value on 01/04/1981 – Land and development charges deductible from sale consideration

CIT vs. Vasavi Pratap Chand; 398 ITR 316 (Del):

 

A piece of land
was owned by co-owners. They entered into an agreement with A on 02/05/1984. In
terms of the agreement, the building on the land was to be demolished and an
apartment complex was to be constructed thereon. It was agreed that the
co-owners would get built up area of 89,136 sq. ft. which constituted 56% of
the total built up area. 44% of the built-up area would belong to A. The entire
cost of construction was to be met by A. The co-owners entered into agreements
with various flat buyers and ultimately sold constructed flats during the
assessment years 1993-94 to 1995-96. In the A. Y. 1995-96, the three co-owners
sold 18,636 sq. ft. of built up area for a total consideration of Rs.
4,72,98,075. Each co-owner disclosed a loss of Rs. 31,30,663 under the head
“capital gains” in his individual return. The Assessing Officer held that the
cost of acquisition of property (one-third share) would be only Rs. 2,03,334.
In other words, the Assessing Officer adopted the computation of cost of
acquisition in the manner indicated in section 49(1)(i) of the Wealth-tax Act,
1957. The Tribunal held that the figure indicated in the wealth-tax return
filed by the assessee could not be taken to be the basis for determining
capital gains. It held that the agreement of sale clearly showed that 56% of
the built-up area including the land would be retained by the assessee and 44%
by the builder. There was simultaneous transfer of possession of 44% of land by
the assessee to the builders and possession of 56% of the built-up area by the
builder to the assesses in the financial year 1991-92 in terms of section 2(47)
of the Income-tax Act, 1961 read with section 53A of the Transfer of Property
Act. The Tribunal further held that the cost of acquisition of land had to be
its market value as on 01/04/1981. It did not reduce the land and development
charges from the sale consideration.

 

On appeal, the Delhi High Court held as under:

 

“i)   There was transfer of
title to the land by the assessee in favour of A. What was transferred under
the collaboration agreement was only 44% of the land owned by them in exchange
for 56% of the built-up area and not the entire land. Further, the assesee not
only transferred the flats to the buyers but the proportionate right in the
appurtenant land as well. There was transfer of possession of 44% of the land
by the assesee to the builder and possession of 56% of the built-up area by the
builder to the assessee in terms of section 2(47) of the 1961 Act read with
section 53A of the Transfer of Property Act.

 

ii)   The consideration for the
transfer of 44% land was the cost of construction of the 56% built-up area. The
land and development charges had to be reduced from the sale consideration.

 

iii)   The value declared in
the tax return filed by the assessee under the Wealth-tax Act could not be
taken to be the cost of acquisition in the hands of the assessee. The cost of
acquisition of land had to be the market value of land as on 01/04/1981.”

30. Section 153 – Assessment – Limitation – Computation of period – Exclusion of time during which assessment proceedings stayed by Court – Expl. 1 – A. Y. 2006-07 – Effect of section 153 – Period between vacation of stay and receipt of order by Income Tax Department not excluded – Vacation of stay on 09/11/2016 – Order of reassessment passed on 30/01/2017 – Barred by limitation

Saheb Ram Omprakash Marketing P. Ltd. vs.
CIT; 398 ITR 292 (Del):

 

In the case of the assessee, a notice u/s.
148 of the Act, was issued on 27/03/2012 for reopening the assessment for the
A. Y. 2006-07. The assessee filed a writ petition and challenged the validity
of the notice and the reassessment proceedings. The High Court granted stay of
the reassessment proceedings by an order dated 18/03/2013. The stay was vacated
by an order dated 09/11/2016. According to the assessee, on the date of the
stay order being vacated i.e., on 09/11/2016, there were only 13 days left for
passing the reassessment order where period is extended to 60 days by
Explanation 1 to section 153. Therefore, the assessee claimed that a valid reassessment
order could have been passed only up to 08/01/2017, i.e. within 60 days from
09/11/2016; the date on which the stay was vacated by the Court. The Department
rejected the assessee’s claim. It was the claim of the Department that the said
order of the Court dated 09/11/20016 was received by the Department on
02/12/2016 and therefore, the Department would have 60 days from 02/12/2016 to
pass the order of reassessment. Accordingly, the Assessing Officer passed the
reassessment order on 30/01/2017. 

 

The assessee filed a writ petition and
challenged the validity of the reassessment order on the ground of limitation.
The Delhi High Court allowed the writ petition and held as under:

 

“i)   In terms of explanation 1
to section 153 of the Act, in computing the period of limitation “the period
during which the assessment proceedings are stayed by an order or injunction by
the court” shall be excluded. In terms of the first proviso to Explanation 1,
where, after the vacation of stay, the period available to the Assessing
officer to complete the reassessment proceedings is less than 60 days, then
such remaining period shall be extended to 60 days and the period of limitation
shall be deemed to be extended accordingly.

 

ii)   Clause (ii) of
Explanation 1 only excludes from the computation of limitation, “the period
during which the assessment proceeding is stayed by an order or an injunction
of any court”. It does not exclude the period between the date of the order of
vacation of stay by court and the date of receipt of such order by the
Department.

 

iii)   Circular No. 621 dated
19/12/1991, issued by the CBDT, while explaining the reason for introduction of
the proviso to Explanation 1, acknowledged that the time remaining after
vacation of stay in terms of section 153(2) of the Act may not be sufficient to
complete the reassessment proceedings which is why the language used in the
first proviso is that the period “shall be extended to 60 days” for passing the
assessment order in terms of section 153(2) of the Act, if the period remaining
within limitation after the excluded period has elapsed, is less than 60 days.

 

iv)  The Revenue could not take
advantage of the fact that it received the copy of the order dated 09/11/2016
of the Court only on 02/12/2016 to contend that the assessment order having
been passed on 30/01/2017 within 60 days of the date of receipt of the order of
the High Court, was not issued (passed) beyond the period stipulated u/s.
153(2) of the Act read with the proviso to Explanation 1 thereof.

 

v)   Even otherwise, the
assertion that the Revenue was aware of the order only on 02/12/2016 was not
correct. The Revenue had been unable to dispute the fact that, on 30/11/2016, a
notice was issued by the Assessing Officer u/s. 142(1) of the Act and this was
pursuant to the order passed by this Court on 09/11/2016. Clearly, therefore,
on the date such notice was issued, the Assessing Officer was aware of the
order dated 09/11/2016 of the Court. Also, the order dated 09/11/2016 was
passed in the presence of counsel of the Revenue and, therefore, the Revenue
clearly was aware of the order on that date itself.

 

vi)  The order dated 30/01/2017
was time-barred.”

29. Section 254 –Appellate Tribunal – Power and duties as final fact finding authority –A. Y. 2009-10 and 2010-11 – Must reappraise and reappreciate all factual materials – Failure by Tribunal to render complete decision in terms of powers conferred on it – Matter remanded to Tribunal

Thyrocare Technologies Ltd. vs. ITO(TDS);
398 ITR 443 (Bom):

 

The assessee
is a sample testing laboratory. The Assessing Officer was of the view that the
sample collectors were not independent persons but were agents of the assessee
which was the principal and that it was an arrangement with the sample
collectors to avoid the obligation to deduct tax at source. The assessee
submitted before the Commissioner (Appeals) that the samples were not collected
directly by it from the patients, but by the sample collectors who visited the
patients and thereafter, brought the samples to it for testing. It was also
submitted that there was no privity of contract between it and the patients and
that the sample collectors did not collect the samples exclusively for it, but
were free to send the samples collected by them for testing to any other
laboratories and therefore it was a principal to principal relationship. The
order of the Assessing Officer was set aside by the Commissioner (Appeals). The
Tribunal held that the payments made by the assessee to the sample collectors
were in the nature of commission or brokerage which was evident from the
affidavit-cum-undertaking executed by the sample collectors and their
application forms for appointment as sample collectors and also from the
statements recorded during the survey u/s. 133A of the Income-tax Act, 1961
(Hereinafter  for the sake of
brevity  referred to as the “Act”).
It also held that the assessee did not satisfactorily explain the queries
raised. It further held that the Commissioner (Appeals) erred in not correctly
appreciating the nature of the payments made to the sample collectors, that
there was a principal and agent relationship between the assessee and the
sample collectors and deleting the interest levied u/s. 201(1A).

 

In appeal before the High Court, the
assessee raised the issue whether the findings of the Tribunal that the
assessee had not “satisfactorily explained the queries”, “not produced any
documents to substantiate the contention” and “not discharged the burden”, were
perverse, contrary to the facts on record and that it never indicated during
the hearing that it was not satisfied with the evidence. The Bombay High Court
remanded the matter back to the Tribunal and held as under:

“i)   The order of the Tribunal
was vitiated not only by non-application of mind but also by misdirection in
law. The Tribunal as the last fact finding authority, failed to make any
reference to the observations, findings and conclusions in the order of the
Assessing Officer and that of the first appellate authority.

 

ii)   It termed certain facts
as undisputed, whereas, they were very much disputed such as the non-admission
by the assessee that the service providers were its agents or that they were
allowed to collect the necessary charges from its clients for collecting the
sample and delivering the reports. There was no reference to any communication
or any document which indicated that the Tribunal’s queries had not been
satisfactorily answered by the assessee.

 

iii)   The
Tribunal should, independent of the statements recorded during the survey u/s.
133A, have referred to such of the materials on record which disclose that the
assessee had entered into such arrangements so as to have avoided the
obligation to deduct tax at source. If the arrangements were sham, bogus or
dubious, then such a finding should have been rendered.

 

iv)  The Tribunal was obliged,
in terms of the statutory powers conferred on it, to examine the matter,
reappraise and reappreciate all the factual materials satisfactorily. It had
not rendered a complete decision and its order was to be set aside.

 

v)   We direct the Tribunal to
hear the appeals afresh on the merits and in accordance with law after giving
complete opportunity to both sides to place their versions and arguments. The
Tribunal shall frame proper points for its determination and consideration and
render specific findings on each of them.”

28 Sections 253 and 254 –Appeal to Appellate Tribunal – Condonation of delay – A. Ys. 1994-95 and 1996-97 – Delay of 2984 days in filing appeal – Request for condonation of delay not to be refused unless delay is shown to be deliberate and intentional – Orders of Tribunal rejecting condonation of delay based on irrelevant factors – erroneous – delay condoned – Appeals filed by assessee to be restored for adjudication by Tribunal

Vijay Vishin Meghani vs. Dy. CIT; 398 ITR
250 (Bom):

 

For the A. Ys. 1994-95 and 1996-97, the
assessee filed appeals before the Appellate Tribunal against the orders of the
Commissioner (Appeals) with a delay of 2,984 days. The assessee made applications
for condonation of delay. The assessee submitted an affidavit stating that he
followed the advice given by his chartered accountant not to file further
appeals before the Tribunal for the A. Ys. 1994-95 and 1996-97, as the issue
involved was    identical to the appeal
filed before the Tribunal for the A. Y. 1993-94, which was then pending before
the Tribunal, to avoid multiplicity of litigation and that after the
adjudication of appeal for the A. Y. 1993-94 by the Tribunal, he could move a
rectification application before the Assessing Officer to bring the assessment
order in conformity with the decision of the Tribunal. In support of the
averments made in the affidavit, the assessee also filed an affidavit by one of
the partners of the firm of chartered accountants.

 

The Tribunal dismissed the appeal in limine
and observed that a chartered accountant could not have given an absurd advice.
The affidavit filed by the firm of chartered accountants was rejected. The
affidavit filed by the assessee was also rejected on the ground that it gained
strength only from the affidavit filed by the firm of chartered accountants.
The Tribunal held that the assessee had failed to show the reasons for the
entire period of delay, i.e., no reason was given for the delay that occurred
between periods and therefore, the delay in filing the two appeals could not be
condoned. In a miscellaneous application u/s. 254(2).

 

The Bombay High Court allowed the appeals
filed by the assessee against the said orders of the Tribunal dismissing the
appeals as barred by limitation and held as under:

 

“i)   None should be deprived
of an adjudication on the merits unless the Court or the Tribunal or appellate
authority found that the litigant had deliberately and intentionally delayed filing
of the appeal, that he was careless, negligent and his conduct lacked
bonafides. Those were the relevant factors.

 

ii)   The Tribunal’s order did
not meet the requirement set out in law. It had misdirected itself and had
taken into account factors, tests and considerations which had no nexus to the
issues at hand. The Tribunal, therefore, had erred in law and on the facts in
refusing to condone the delay. The explanation placed on affidavit was not
contested nor could it have been concluded that the assessee was at fault, that
he had intentionally and deliberately delayed the matter and had no bona
fide or reasonable explanation for the delay in filing the proceedings. The
position was quite otherwise.

 

iii)   In the light of the
above discussion, we allow both the appeals. We condone the delay of 2,984 days
in filing the appeals but on the condition of payment of costs, quantified
totally at Rs. 50,000. Meaning thereby,  
Rs. 25,000 plus 25,000 in both appeals. The cost to be paid in one set
to the respondents within a period of eight weeks from today. On proof of
payment of costs, the Tribunal shall restore the appeals of the assessee to its
file for adjudication and disposal on the merits.”

 

39. Search and seizure – Assessment u/s. 153A – A. Ys. 2003-04, 2006-07 to 2008-09 – Assessee can claim deduction in return u/s. 153A or first time before appellate authorities

CIT vs. B. G. Shirke Construction Technology P. Ltd.; 395
ITR 371 (Bom):

The assessee was engaged in the execution of construction
contracts. On 18/12/2008, there was a search and seizure action u/s. 132 of the
Income-tax Act, 1961 upon the assessee. Pursuant thereto, notices u/s. 153A
were issued for the A. Ys. 2003-04, 2006-07 to 2008-09. As the assessment for
the A. Ys. 2007-08 and 2008-09 were pending before the Assessing Officer, they
stood abated in view of the second proviso to section 153A(1) of the Act.
Consequently, the assessee filed the returns of income for the subject
assessment years u/s. 153A read with section 139(1) of the Act. In its returns
of income, the assessee had offered the income on account of execution of
contracts but had not excluded the amounts retained by its customers till the
completion of the defect liability period after completion of the contract.
This amount could not be quantified in a short time available to file the
returns of income. Therefore, the assessee had filed a note along with its
returns of income pointing out the aforesaid facts and its seeking appropriate deduction
when completing the assessments. The note also pointed out that the said amount
had inadvertently not been claimed as a deduction in its original returns of
income. During the assessment proceedings, the assessee quantified its claim
year wise placing reliance on relevant clause of the contract with its
customers, so as to claim deduction to the extent the customers have retained
(5–10%). The Assessing Officer quantified the claim amount but did not allow
the claim holding that he does not have power to allow the claim in view of the
judgment of the Supreme Court in Goetze (India) Ltd. vs. CIT 284 ITR 323
(SC). The Tribunal held that although it is undisputed that the computation of
income did not reflect the actual quantification of the amount of retention
money held by the customers which cannot be subject to tax, but the note filed
along with the return of income indicated the claim in principle. The
quantification was explained during the assessment proceedings along with the
relevant clauses of each contract with its customers. The Tribunal held that
the decision of Supreme Court in Goetze (India) Ltd., will not apply to the
present facts as in this case the claim for deduction on account of retention
money had been made along with the return of income, only the quantification of
the amount was made during the assessment proceedings.

The Tribunal held that the claim for deduction was to be
allowed. The Tribunal further held that even if the quantification made during
the assessment proceedings was considered to be a fresh claim and could not
have been entertained by the Assessing Officer, there was no bar/impediment in
raising the claim before the appellate authorities for consideration.
Accordingly, the Tribunal allowed the assessee’s claim for deduction. 

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under:

“i)  The consequence of notice u/s. 153A(1) of the
Income-tax Act, 1961 is that the assessee is required to furnish a fresh return
of income for each of the six of the assessment years in regard to which a
notice has been issued. Section 153A(1) itself provides that on filing of the
return consequent to notice, the provisions of the Act will apply to the return
of income so filed. Consequently, the return filed u/s. 153A(1) of the Act is a
return furnished u/s. 139 of the Act. Therefore, the provisions of the Act
would be otherwise applicable in the case of a return filed in the regular
course u/s. 139(1) of the Act would also continue to apply in the case of a
return filed u/s. 153A of the Act.

ii)  In
the return of income filed u/s. 139(1) of the Act, an assessee is entitled to
raise a fresh claim before the appellate authorities, even if it was not raised
before the Assessing Officer at the time of filing of the return of income or
filing of revised return. The restriction in the power of the Assessing Officer
will not affect the power of the Appellate Tribunal to entertain a fresh claim.
There is no substantial question of law. Appeal is dismissed.”

10 Unexplained Investment – Section 69 – A. Y. 2008-09 – Addition based on invoices, delivery notes and stock statement submitted before bank – AO not examined suppliers of stock – No corroborative evidence to support AO’s claim – Physical verification of stock tallying with books of account maintained by assessee – Verification made by bank not relevant evidence – Addition cannot be made on ground of undisclosed income

CIT vs. Shib Sankar Das; 396 ITR 39 (Cal)

The assessee was an individual, carrying on
business as wholesaler of grocery items under a trade name. The Department had
discovered four invoices and delivery notes upon carrying out a survey of the
business premises of the assessee. The Assessing Officer added the aggregate
value of the goods in accordance with the invoices as undisclosed business income
and percentage profits on such goods presumed to have been sold. Furthermore,
during scrutiny proceedings, it was noticed that the assessee had submitted a
stock statement on February 29, 2008 before the bank in the matter of obtaining
enhanced credit facilities. The stock statement stood verified and acted upon
by the bank. This stock statement showed value of stock far in excess of the
stock in the statement disclosed to the Department. The Assessing Officer added
the difference also as undisclosed business income. The Tribunal deleted the
additions.

On appeal by the Revenue, the Calcutta High
Court upheld the decision of the Tribunal and held as under:

 “i)   The Assessing Officer
ought to have examined the suppliers to find out the truth or otherwise of the
claim. The Tribunal directed 5% of the value of goods, under the delivery
chalan bearing acknowledgment of receipt, to be added to the gross profit and
the addition of the other three purchases deleted. There was no attempt to
adduce corroborative evidence to support the Assessing Officer’s rejection of
the claim of the assessee. This view taken by the Tribunal was a plausible
view.

 ii)  At
the time of survey, physical verification of the stock was made and it tallied
with the books of account maintained by the assessee. When the Department
itself could not detect a discrepancy in the stock, a verification made by a
person not concerned with the assessment could not be relevant evidence to
lawfully presume undisclosed income. The correctness of the verification made
by the bank was not determined. The Tribunal was right in deleting the
addition. No substantial question of law arose.”

18 TDS – Karta – HUF – A. Y. 2012-2013 – Erroneous of PAN of Karta – HUF is entitled to benefit of TDS – Revenue has discretion to grant benefit to family

Naresh Bhavani Shah (HUF) vs. CIT; 396 ITR
589 (Guj):

The assessee was a HUF regularly assessed to
tax under the provisions of Income-tax Act, 1961. The funds belonging to the
assessee were invested in RBI taxable bonds. This was, however, done in the
name of N, the karta of the family. Inadvertently, such investment was made in
his individual name and he was not described as the karta of the family. The
PAN given to the RBI also was that of N in his personal capacity and not that
of the family. Therefore, the RBI while deducting tax at source on the interest
income of such bonds issued certificates of tax deducted at source in the name
of N carrying his permanent account number. In the return of income for the A.
Y. 2012-13, the assessee included the interest from the said RBI bonds and also
claimed Rs. 5,42,800/- TDS on such interest. N, in his individual capacity, had
not included the said interest income and also had not claimed the TDS on the
same. The assessee wrote to the Assessing Officer and pointed out that the
amount of Rs. 5,42,800/- represented tax deducted at source on the income
offered by the assessee and that the benefit of such TDS should be granted to
the assessee, particularly when the karta had no claim on such benefit. The
Assessing Officer assessed the interest income, but refused to give credit of
the TDS. The assessee’s revision petition was rejected.

The Gujarat High Court allowed the writ
petition filed by the assessee and held as under:

“i)   There
was no dearth of power with the Department to grant credit of tax deducted at
source in a genuine case. In the present case, many years had passed since the
event. The facts were not seriously in dispute. The assessee had offered the
entire income to tax. The Depatrment had also accepted such declaration and
taxed the assessee.

ii)   In view of such special facts and circumstances,
the Department    had   to 
give  credit   of 
the  sum     of Rs. 5,42,800/- to the assessee, deducted
by way of tax at source, upon N filing an affidavit before the Department that
the sum invested by the RBI did not belong to him, the income was also not his
and that he had not claimed any credit of the tax deducted at source on such
income for the said assessment year.”

17 Section 245D – Settlement Commission – Settlement of cases – Section 245D – A. Y. 2000-01 to 2006-07 – Order of Settlement Commission after considering facts – Writ by Revenue – No evidence that conclusions of Settlement Commission were perverse – Order valid

CIT vs. Radico Khaitan Ltd.; 396 ITR 644
(Del):

The assessee company R was engaged in the
business of manufacturing and marketing of Indian made foreign liquor, country
liquor, etc. It also generated power for its manufacturing and bottling
plants. R was subjected to a search and seizure operation u/s. 132(1) of the
Income-tax Act, 1961, in its business premises. Search was resorted to also in
the residential premises of its directors, UPDA and at the residence of M,
Secretary General of UPDA. Also, a survey u/s. 133A was conducted at the
business premises of S, one of the core members of the “managing committee” of
UPDA. Many incriminating documents pertaining to the assessee were found and
seized from these premises. Statements of various persons including M were
recorded u/s. 132(4) and 133A of the Act. After collecting all material, the
Assessing Officer issued notices u/s. 153A for A. Ys. 2000-01 to 2006-07
requiring the assessee to file returns. R filed its returns on September 29,
2007 offering an amount of Rs. 4.5 crore for taxation. Thereafter, R filed an
application u/s. 245C of the Act before the Settlement Commission covering all
assessment years and declared additional income for the relevant period to the
extent of Rs. 23 crore. Revenue filed its report under rule 9 of the Income-tax
Settlement Commission Rules, 1987, alleging that concealment of income by the
assessee was Rs. 159,82,92,966/- under various heads. This figure was revised
to Rs. 177,84,16,966/- by a supplementary report dated February 13, 2008. After
hearing the parties and considering the material, the Commission settled the
concealed income of the assessee for all the block years at Rs. 30 crore.

Revenue filed a writ petition and challenged
the order of the Settlement Commission. The Delhi High Court dismissed the writ
petition and held as under:

“i)   The
main thrust of the Revenue’s grievance in these proceedings was with respect to
the amounts said to have been clandestinely given to UPDA as the assessee’s
contribution towards “slush fund” to be used as pay offs to politicians and
public officers in return for favourable treatment. The linkage between the
material seized from the assessee’s premises and those from UPDA’s premises as
well as the statement of M was not established through any objective material.

ii)   It
was now a settled law that block assessments were concerned with fresh material
and fresh documents, which emerged in the course of search and seizure
proceedings; the Revenue had no authority to delve into material that was
already before it and the regular assessments were made having the deposition.
That the assessee’s expenditure claim was bogus, or it had under-reported
income and that it resorted to over invoicing and diversion of funds into the
funds allegedly maintained by UPDA, was not established.

iii)   The
findings of the Commission therefore could not be faulted as contrary to law.
As far as suppression of profits for various financial years, alleged by the
Revenue, the Commission was of the opinion that the documents relied upon were
work estimates and projections that revealed tentative profitability in respect
of the assessee’s activities towards sale of country liquor i.e., that the documents
did not reflect the actual figures. The alleged bogus expenditure to the tune
of Rs. 9,11,41,457/- was claimed in the original assessments as payments made
to F and R. The Revenue alleged that F was involved in entry operations and
that the expenditure claimed by the assessee was bogus and entirely fictitious.
While the expenditure claimed by itself might be suspect, the Revenue had a
further obligation to investigate further having regard to the fact that the
agreement between the assessee and R was disclosed earlier.

The  mere statement  of 
one  employee  of  R
would not have discredited the agreement itself. The
lack of  any particulars to discredit the
services and expenditure claimed by the assessee, justified the
Commission’s   conclusion    that  
the   addition    of  Rs. 9.11 crore demanded by the Revenue or arguments on the basis that the
assessee did not disclose such amount, was not warranted.

iv)  The
Commission’s findings were not contrary to law or unreasonable. The order of the
Settlement Commission was valid.”

16 Section 9(1)(vii) and art 12 of DTAA between India and US – Non-resident – Income deemed to accrue and arise in India – A. Y. 2004-05 – (i) Agreement between resident and non-resident – Non-resident to procure designs and drawings from another non-resident – Designs and drawings supplied and payment received – Transaction one of sale – No royalty accrued to non-resident – tax not deductible at source; (ii) Indian company subsidiary of American company – Expenses incurred on behalf of Indian company by American company – Reimbursement of expenses – No payment for technical services – Amount not assessable u/s. 9 – Tax not deductible at source

CIT vs. Creative Infocity Ltd.; 397 ITR
165(Guj):

The assessee company, a subsidiary company
of C of the USA entered into joint venture undertaking with the Government of
Gujarat for developing and construction of an information technology park at
Gandhinagar, a project awarded to it by the Government of Gujarat. While
carrying out the construction of the project, the assessee entered into a
contract agreement with two non-resident companies, viz., N, and C, for
providing designs and drawings and for marketing and selling services
respectively. During the course of verification of the foreign remittances to
these entities, the Assessing Officer observed from the agreement entered into
between the assessee and N that the services provided by the non-resident
company were rendered towards providing of architectural, structural
engineering designs and drawings services, as mentioned in clause 9 of the
contract. As regards the payments made to C, the Assessing Officer observed
that the payments were made for providing services related to marketing and
selling, projects office administration expenses and promotional expenses and
to design charges which were paid to the employees of C, towards their salary,
travel expenses, etc. Therefore, the Assessing Officer was of the
opinion that since the payments made towards the services rendered by the
foreign companies were taxable as defined in section 9(1)(vii) of the
Income-tax Act, 1961, as well as article 12 of the DTAA between India and US,
the assessee was required to deduct tax at source u/s. 195 of the Act.
Therefore, since the assessee made the payment to the foreign companies without
deducting tax at source, the Assessing Officer passed an order u/s. 201(1) and
(1A) read with section 195 of the Act raising demands. The Commissioner
(Appeals) and the Tribunal deleted the additions/demands.

The Gujarat High Court dismissed the appeal
filed by the Revenue and held as under:

“i)   The
agreement with N was to procure the designs and drawings from architects. In
the agreement, only the assessee and N were the signatories and not the
architects. Thus, N first procured the plans and designs from the architects on
making payment of full consideration and thereafter supplied it to the assessee
as an outright sale. There were concurrent findings by both the Commissioner
(Appeals) as well as the Tribunal holding that (a) the assessee had purchased
drawings from N and not from the architects; (b) that the payment made by the
assessee towards supply of designs and drawings to N was for an outright
purchase and therefore, not taxable as royalty. The payment made towards supply
of designs and drawings to a non-resident was outright purchase and therefore,
not taxable as royalty u/s. 9(1) of the Act.

ii)   The
agreement was for reimbursement of expenses incurred by C for marketing. The
expenses incurred by C were fully supported by the vouchers and certified by
the certified public accountant of the USA as well as the chartered accountant
of India certifying that the expenses were in fact reimbursement. There were
concurrent findings by the Commissioner (Appeals) as well as the Tribunal that
the amount was reimbursed and could not be said to be any amount paid to C for
rendering any service to the assessee. The findings of fact recorded by both
the lower appellate authorities were on appreciation of facts and considering
the material on record, more particularly the agreement entered into between
the assessee and C. It was not alleged that the findings of fact recorded by
lower authorities were perverse or contrary to the evidence on record. C had no
business activity or permanent establishment in India. It was neither working
through any agent nor had any branch in India. Therefore, the provisions of
section 9(1)(vi)(vii) would not have any application as the amount paid was
neither royalty nor fees for technical services.“

15 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2006-07 – Notice for levy of penalty – Notice should state specific grounds for levy of penalty – Printed form not sufficient

Muninga Reddy vs. ACIT; 396 ITR 398
(Karn)

 For the A. Y. 2006-07, after completing the
assessment, the Assessing Officer imposed penalty of Rs. 1,78,35,511/- for
concealment of income u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal
confirmed the penalty.

On appeal by the assessee, the Karnataka
High Court reversed the decision of the Tribunal and held as under:

“i)   In
order to levy penalty, the notice would have to specifically state the ground
mentioned in section 271(1)(c) of the Income-tax Act, 1961, namely whether it
is for concealment of income or furnishing incorrect particulars of income that
the penalty proceedings are being initiated. Sending a printed form with the
grounds mentioned in section 271(1)(c) of the Act would not satisfy the
requirement of law. The assessee should know the ground which he has to meet
specifically, otherwise the principles of natural justice would be violated and
consequently, no penalty could be imposed on the assessee if there is no
specific ground mentioned in the notice.

ii)   There
was a printed notice and no specific ground was mentioned, which may show that
the penalty could be imposed on the particular ground for which the notice was
issued. Hence, the notice and the consequent levy of penalty were not valid.”

14 Sections 194A, 194H, 201(1A), 276B and 279(1), and section 482 of Cr PC 1973 – TDS – Failure to deposit – Assessee depositing tax with interest once mistake of its accountant revealed during audit – Reasonable cause – Prosecution initiated three years after such payment – Not permissible

Sonali Auto Pvt. Ltd. vs. State of Bihar
(Patna); 396 ITR 636 (Patna):

A prosecution u/s. 276B of the Income-tax
Act, 1961 was initiated against the assessee on the basis of a complaint filed
by the Deputy Commissioner in accordance with the sanction granted by the
Commissioner u/s. 279(1) of the Act, for failure to deposit the tax at source
for the financial year 2009-10. The complaint also stated that there was a
delay of 481 days without any reasonable cause. The Special Judge, Economic
Offences, took cognisance against the assessee company and its three directors
for the offence u/s. 276B.

The assessee filed writ petition u/s. 482 of
Cr PC 1973 and challenged the prosecution proceedings. The assessee submitted
that due to oversight on the part of its accountant, it could not deposit the
tax deducted at source within the specified time limit, that once the mistake
was found during the audit, the amount had been deposited along with the
interest due u/s. 201(1A) for the delayed payment of tax deducted at source and
that the complaint had been filed after a lapse of three years from the date of
payment of dues. The Patna High Court allowed the petition and held as under:

 “i)   Reasonable
cause would mean a cause which prevents a reasonable person of ordinary
prudence acting under normal circumstances, without negligence or inaction or
want of bonafides. The assessee had been able to prove reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. Oversight on the part of the accountant, who was appointed to deal with
accounts and tax matters, could be presumed to be a reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. The assessee immediately after noticing the defects by its auditors had
deposited the amount along with interest as required u/s. 201(1A) for the
delayed payment in 2010 itself.

ii)   Prosecution
had been launched against the assessee after a lapse of about three years from
the date of deposit of the due amount of tax deducted at source along with
interest and that was contrary to the instruction, F. No. 255/339/79-IT(Inv),
dated May 28, 1980 issued by CBDT in that regard. Moreover, according to the
provisions of section 278AA, no person for any failure referred to u/s. 278B
should be punished under the provisions if he had proved that there was a
reasonable cause for such failure.

iii)   Continuance
of criminal proceedings u/s. 276B of the Act, against the assessee was mere
harassment and abuse of process of court. Accordingly, the order passed by the
special judge, Economic Offences, taking cognisance of the offence u/s. 276B of
the Act, along with the entire criminal proceedings against the assessee were
quashed.”

13 Section 206C(1C) – A. Ys. 2005-06 to 2007-08 – Scope of section 206C(1C) – Collection of tax at source from agents who collect toll etc. – No obligation to collect tax at source from agent who collected octroi

CIT(TDS) vs. Commissioner, Akola
Municipal Corporation; 397 ITR 226 (Bom):

The respondent assessee is the Municipal
Corporation for the town Akola. For the A. Ys. 2005-06 to 2007-08, the
assesssee had entered into a contract called agency agreement, by virtue of
which the assessee appointed an agent to provide services of collecting octroi
on its behalf. This octroi was collected at the rates fixed by the assessee,
for which the necessary receipts are also issued in the name of the assessee.
The entire amount collected by the agent is remitted to the assessee and the
agent is entitled to a commission depending upon the quantum of octroi
collected during the year. The ITO(TCS) was of the view that that the assessee
was obliged to collect tax at source u/s. 206C(1C) of the Income-tax Act, 1961
in respect of octroi collection received from the agent. Since the assessee had
not collected and deposited such tax, the ITO(TCS) passed order u/s. 206C and
raised a demand of Rs. 1.09 crore for failure to collect tax at source and
interest of Rs. 15.96 lakh on the same. The Tribunal cancelled the demand.

On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:

“i)   It
is a settled position of law that fiscal statutes are strictly construed.
Section 206C(1C) of the Income-tax Act, 1961, provides that a person who grants
an agency or licence, or in any other manner transfers his right in respect of
a parking lot, toll plaza or a mine and quarry to another person, while
receiving the amount so collected from the agent or licensee (the transferee of
its right), should also collect tax at source. The above obligation is only
restricted to parking lots, toll plazas or mine or quarry. This obligation does
not extend to octroi.

 ii)   The
Seventh Schedule to the Constitution of India empowers the state to levy octroi
as found in entry 52 of List II thereof, while entry 59 of List II of the
Seventh Schedule to the Constitution empowers the State to collect tolls. Thus,
there is a basic constitutional difference between the two levies. A “toll” is
normally collected on account of use of the roads by animals and humans. As
against which, “octroi” is normally collected on account of goods entering the
corporation limits (area) for use, consumption or sale.

iii)   Section
206C(1C) cannot be extended to collection of octroi. The Legislature when it
brought in section 206C(1C) of the Act, has not authorised the collection of
tax at source in respect of octroi. It specifically restricted its obligation
to only three categories namely parking, toll plaza, mining and quarrying. No
fault can be found with the impugned order of the Tribunal.”

12 Section 41(1) – Business income – Deemed income – A. Y. 2000-01 – Remission or cessation of trading liability – Condition precedent for treating sum as deemed profits – Sum should have been claimed as allowance or deduction in earlier year – Advance received from parent company for business purposes to be adjusted against future supplies – Transfer of advances to capital reserve – Capital receipt not liable to tax

Transworld Garnet India Pvt. Ltd. vs.
CIT; 397 ITR 233 (Mad):

The shareholding in the assessee-company was
held to the extent of 74 percent, by a company T which in turn was wholly held
by W, Canada. The assessee was set up completely with the investment from the
parent company W.  Advances were also
received from W towards business needs and the advances were to be adjusted against
future supplies of garnet to W. Due to various logistic and administrative
reasons, the assessee incurred losses. The private sources that were approached
for their participation in the equity insisted upon equal investment to be made
by the foreign company W in order to dilute the losses incurred, as a
pre-condition to their investment. Accordingly, W directed the assessee to
convert the advances made by it into capital, which was complied with by the
assessee. It transferred the amount to general reserve.

The Assessing Officer was of the view that
the amount ought to have been taken to the profit and loss account instead of
the general reserve. He held that the provisions of section 41(1) of the
Income-tax Act, 1961 relating to cessation of liability were attracted and that
the amount was liable to be brought to tax. Accordingly, he passed an order
u/s. 143(3) r.w.s.147 assessing that as income. The Commissioner (Appeals)
accepted the assessee’s submission that the amount constituted a capital
receipt. He recorded a finding to the effect that the conversion of the
advances resulted in wiping out of the losses and paved the way for the entry
of the resident participant. He also held that the provisions of section 41(1)
were attracted only in a situation where the amount in question, in respect of
which liability had ceased, had been claimed as an allowance or a deduction in
any previous year, which fact had not been established in the assessee’s case.

He further held that there was no nexus
between the allowance/deduction in the previous years and the amount in
question to invoke section 41(1). The Appellate Tribunal held that the amounts
were originally received as advances against the supply of garnet and
subsequently, the claim over the amount partook of the character of a revenue
receipt. It further held that the subsequent transfer of the amounts to general
reserve constituted only an application, that would not change the nature of the taxability of the amounts at a stage anterior thereto.

On appeal by the assessee, the Madras High
Court reversed the decision of the Tribunal and held as under:

“i)  In order for the
provisions of section 41(1) to be attracted, the benefit obtained by the
assessee in the relevant year should have a direct nexus with an allowance or
deduction for any previous year as a claim of loss, expenditure or trading
liability which has not been established in the assessee’s case.

ii)  The findings of the
Commissioner (Appeals) were based upon the financials as well as all the
relevant documents. He also found that there was nothing on record to lead to
the conclusion that the advances from W had been claimed as an allowance or
deduction in any previous year. The circumstances in which the infusion of
capital was made and the findings that related thereto were undisputed. The
amount though received as advances for the supply of garnet had remained static
without depletion of any sort.

iii)  The entire amount had
been converted to shareholding and consequently, benefit could be said to have
accrued to the assessee only in the capital field. The substantial questions of
law are answered in favour of the assessee and the appeal allowed.”

35. Charitable purpose – Exemption u/s. 11 – A. Ys. 2006-07 and 2009-10 – Education main activity of assessee – Publishing and printing books and selling them at subsidised rates or distributing them at free of cost – Profit earned thereby utilised for education – Denial of exemption erroneous-

Delhi Bureau of Text Books vs. DIT(Exemption); 394 ITR 387
(Del):

The assessee was registered as a charitable institution u/s.
12A(a) of the Act, 1961. It printed and published text books for Government
schools and sold them at subsidised rates with nominal profits. It also
distributed free books, reading material and school bags to needy students. Its
income was exempt from tax u/s. 11 of the Act, during the A. Ys. 1971-72 to
2005-06. It was denied the benefit of exemption for the A. Ys. 1975-76 and
1976-77, but the Commissioner (Appeals) restored the exemption and the same was
confirmed by the Tribunal. For the A. Ys. 2006-07 to 2009-10, the Assessing
Officer denied the exemption and the same was confirmed by the Appellate
Tribunal. The Tribunal held that the asessee’s activities were in the nature of
business, that compliance with the requirement of section 11 could be examined
in every assessment year, that in its earlier order for the A. Ys. 1975-76 and
1976-77, it had not considered the assessee’s income and expenditure statements
or other relevant evidence, that the assessee had not maintained separate books
of account for its activities of sale and purchase of books thereby violating
the provisions of section 11(4A), and that the assessee had made accumulation
in excess and ”without specifying any purpose” and “was not wholly for
charitable purposes”.

On appeal by the assessee, the Delhi High Court reversed the
decision of the Tribunal and held as under:

“i)  The preparation and distribution of text books
contribute to the process of training and development of the mind and the
character of students. There does not have to be a physical school for an
institution to be eligible for exemption. What is important is the activity. It
has to be intrinsically connected to “education”.

ii)  The Appellate Tribunal was incorrect in
denying exemption to the assessee u/ss 11 and 12 of the Act. It erred in
holding that the activities carried out by the assessee fell under the fourth
limb of section 2(15), “the advancement of any other object of general public
utility” and that its activities were not solely for the purpose of advancement
of education. It came to the erroneous conclusion merely because the assessee
had generated profits out of the activity of publishing and selling text books
that it had ceased to carry on the activity of “education”.

iii)  It failed to consider the issue in the
background of the setting up of the assessee, its control and management and
the sources of its income and the pattern of its expenditure and that its
surplus amount was again utilised in its main activity of “education”. The
assessee contributed to the training and development of the knowledge, skill,
mind and character of the students.

iv) The exemption had been granted to the assessee
u/s. 11 and 12 from the A. Ys. 1971-72 to 2005-06 consistently for 34 years.
For the A. Ys. 1975-76 and 1976-77, grant of exemption had been restored by the
Appellate Tribunal which was not contested by the Department. Apart from the
fact that the assessee had earned more profits from its essential activity of
education, there was no change in the circumstances concerning its activity of
publishing and selling books during the A. Ys. 2005-06 to 2009-10. There was no
justification to warrant a different approach. Appeals are allowed.”

34. Capital gains- Exemption u/s. 54F – A. Y. 2012-13 – Assessee getting more than one residential house in several blocks – All flats product of one development agreement on same piece of land – Flats located in same address – Assessee is entitled to benefit of exemption u/s. 54F

CIT vs. Gumanmal Jain; 394 ITR 666 (Mad):

The assessee and his two sons owned certain contiguous
extents of land. The assessee along with his two sons entered into a joint
development agreement with a builder to develop the land by constructing 16
flats therein with a total built up area of 56,945 sq. ft. The assessee and two
sons on the one hand and the builder on the other hand agreed to share in 70:30
ratio between them. The land was developed, 16 flats with separate kitchens and
37 car parks were put up. In lieu of the 70:30 ratio set out in the builder’s
agreement, the assessee got 9 flats and the sons got 3 flats each. For the A.
Y. 2012-13, the Assessing Officer rejected the assessee’s claim for exemption
u/s. 54F of the Act, 1961 on the ground that the assessee owned more than one
residential house and assessed the long term capital gain of Rs. 2,31,56,430 to
tax. The Commissioner (Appeals) allowed the assessee’s claim for exemption and
the same was upheld by the Tribunal.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under:

“i)  The assessee having got flats along with his
two sons would not disentitle him from getting the benefit u/s. 54F of the Act
only on the ground that all the flats were not in the same block, particularly
in the light of the admitted factual position that all the flats were located
at the same address. As long as all the flats were in the same address, even if
they were located in separate blocks or towers it would not alter the position.

ii)  After all, all the flats were a product of one
development agreement of the same piece of land. Therefore, the assessee was
entitled to get the benefit of section 54F of the Act.”

33. Business expenditure – Exempt income- Disallowance u/s. 14A- A. Y. 2011-12 – If no exempt income is earned in the assessment year in question, there can be no disallowance of expenditure in terms of section 14A read with Rule 8D even if tax auditor has indicated in his tax audit report that there ought to be such a disallowance

Principal CIT vs. IL & FS Energy Development Company
Ltd.; [2017] 84 taxmann.com 186 (Delhi)

Assessee is a company engaged in provision of consultancy
services. On 26th September 2011, the Assessee filed its return at a
loss of Rs. 2,42,63,176/- for the A. Y. 2011-12. The Assessee had not earned
any exempt income in the relevant year. The assessee had not made any
disallowance u/s. 14A of the Act, 1961. The Assessing Officer computed the
disallowable amount u/r. 8D and made disallowance. The Tribunal held that since
the assessee had not earned any exempt income in the relevant year there can be
no disallowance u/s. 14A of the Act and allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:

“i)  The key question in the present case is
whether the disallowance of the expenditure will be made even where the
investment has not resulted in any exempt income during the AY in question but
where potential exists for exempt income being earned in later AYs.

ii)  Section 14A does not particularly clarify
whether the disallowance of the expenditure would apply even where no exempt
income is earned in the AY in question from investments made, not in that AY,
but earlier AYs.

iii)  The words “in relation to income which
does not form part of the total income under the Act for such previous year”
in the above Rule 8D(1) indicates a correlation between the exempt income
earned in the AY and the expenditure incurred to earn it. In other words, the
expenditure as claimed by the Assessee has to be in relation to the income
earned in ‘such previous year‘.

iv) This
implies that if there is no exempt income earned in the AY in question, the
question of disallowance of the expenditure incurred to earn exempt income in
terms of section 14A read with Rule 8D would not arise.

v)  The mere fact that in the audit report for the
AY in question, the auditors may have suggested that there should be a
disallowance cannot be determinative of the legal position. That would not
preclude the assessee from taking a stand that no disallowance u/s. 14A of the
Act was called for in the AY in question because no exempt income was earned.”

32. ALP – Computation- Sections 92 and 92C – A. Y. 2011-12 – Determination of operating costs- Agreement between parties – Reimbursement of costs received from AEs – Finding that reimbursement of cost of infrastructure was without a mark up- Claim of assessee to exclude cost of infrastructure to be allowed

Principal CIT vs. CPA Global Services Pvt. Ltd.; 394 ITR
473 (Del):

The assessee is a wholly owned subsidiary of CPA Mauritius
Ltd., which in turn is a subsidiary of CPA Jersey. It offers a range of legal
support services to its associated enterprises (AEs) as well as to independent
third party customers. During the A. Y. 2011-12, the assessee received an
amount from its associated enterprises as “cost recharge on account of spare
capacity” which was not reflected in its profit and loss account. The Transfer
Pricing Officer (TPO) was of the view that the assessee had not produced any
evidence in support of its claim that the expenditure was towards maintenance
of spare capacity at the instance of the AEs.

The Dispute Resolution Panel (DRP) held that the arm’s length
price (ALP) of the receipts from the AEs included all the costs and that the
assessee did not give sufficient reasons to exclude certain costs for the
purposes of computing the ALP. While the application filed by the assessee u/s.
154 of the Income-tax Act, (hereinafter for the sake of brevity referred to as
the “Act”) 1961 was pending before the DRP, a draft assessment order
was passed by the Assessing Officer based on the decision of the DRP. Before
the Appellate Tribunal, the assessee referred to the agreement with its AEs and
submitted that the reimbursement towards the cost of service with a mark up had
been accounted for in working out the ALP in the transfer pricing study and the
other reimbursement it sought to exclude from the operating costs was towards
the cost of infrastructure on which there was no mark up. The Appellate
Tribunal held that the reimbursement cost should be excluded as they did not
involve any functions to be performed so as to consider it for profitability
purposes and directed the TPO to exclude the reimbursement costs while working
out the operating costs.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:

“i)  The Appellate Tribunal after examining the
agreement between the assessee, and its AEs had agreed with the assessee that
the reimbursement of the infrastructure cost had no mark up. Unless there was a
specific plea by the Department to the effect that such a factual finding was
perverse, on a general plea of perversity, the appeal could not be entertained.
Also, it should be accompanied by a reference to the relevant document which
formed part of the record of the case before the Appellate Tribunal.

ii)   No
substantial question of law arises from the order of the Tribunal. Appeal is
dismissed.”

45 Section 92C – Transfer pricing Computation of arm’s length price (ALP) – A. Y. 2006-07 – Comparable and adjustment – There is no provision in law which makes any distinction between a Government owned company and a company under private management for purpose of transfer pricing audit and/or fixation of ALP – A company cannot be excluded as a comparable only on ground that company has far higher turnover – Where both comparable and assessee were in segment of manufacture of tractors and power tillers and all functions of comparable company and assessee were same, said company should not be rejected as a comparable only because of its higher turnover

CIT vs. Same Deutz – Fahr India (P.)
Ltd.; [2018] 89 taxmann.com 47 (Mad):

 

The assessee-company was in the segment of
manufacture of tractors and power tillers. It entered into international
transactions with its associated enterprise (AE). The Transfer Pricing Officer
(TPO) had rejected the comparable companies selected by the assessee except one
VST Tillers in the transfer pricing documentation on the ground that the said
company recorded huge turnover whereas the turnover of assessee was very small
and, hence, not comparable. TPO had selected HMT Limited as one of the
comparables on functional similarity, but while determining the ALP, he had not
included HMT Limited as a comparable. The Tribunal found, on facts, that both
were comparable and the assessee was in the segment of manufacture of tractors
and power tillers and all the functions of HMT Limited and the assessee were
the same and that TPO ought not to have rejected said company as a comparable
only because of its higher turnover, as it would be impossible to find out
comparables with all similarities, including similarity of turnover.

 

On appeal by the Revenue, the Madras High Court upheld the decision
of the Tribunal and held as under

 

“i)  The Tribunal very rightly
observed and held that refusal to include a company as a comparable only on the
ground that the company had far higher turnover was not justified. The Tribunal
also very rightly observed that no comparable could have exactly the same
turnover. The Tribunal found, on facts, that both comparable and the assessee
was in the segment of manufacture of tractors and power tillers and all the
functions of HMT Limited and the assessee were the same and that TPO ought not
to have rejected said company as a comparable only because of its higher
turnover, as it would be impossible to find out comparables with all
similarities, including similarity of turnover.

 

ii)  In the grounds of appeal,
it is urged that the Tribunal failed to appreciate that HMT Limited was a
Government owned company and the functions performed under Government
management were altogether different from a private company. There is no provision
of law which makes any distinction between a Government owned company and a
company under private management for the purpose of transfer pricing audit
and/or fixation of ALP. There is no reason why a Government owned company
cannot be treated as a comparable.

 

iii)           It
is reiterated that the Tribunal found, on facts, that the functionality of HMT
Limited and the assessee were the same. In our considered opinion, the decision
of the Tribunal does not warrant interference of this court.”

44 TDS – Fees for technical services or payment for work – Sections 194C and 194J – Fees for technical services or payment for work – Sections 194C and 194J – A. Ys. 2008-09 to 2011-12 – Broadcasting of television channels – Placement charges, subtitling, editing expenses and dubbing charges – Are part of production of programmes – Not fees for professional or technical services – Amounts paid falling u/s. 194C and not section 194J

CIT vs. UTV Entertainment Television
Ltd.; 399 ITR 443 (Bom):

 

The assessee company carried on the business
of broadcasting of television channels. It paid certain amounts on account of
carriage/placement fees, editing/subtitling expenses and dubbing charges. Tax
at source was deducted by the assessee on these amounts u/s. 194C of the Act,
at the rate of 2%. The relevant period is A. Ys. 2008-09 to 2011-12. The
Assessing Officer was of the view that the amounts were in the nature of fees
payable for technical services and, therefore, tax should have been deducted
u/s. 194J. Accordingly he passed orders u/s. 201(1)/201(1A) and raised demand.
The Commissioner (Appeals) and the Tribunal accepted the assesee’s claim and
held that the tax has been rightly deducted at 2% u/s. 194C of the Act.
Accordingly, they set aside the order of the Assessing Officer.

 

On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:

 

“i)  When
services are rendered as part of the contract accepting placement fees or
carriage fees, they were similar to services rendered against the payment of
standard fees paid for broadcasting of channels of any frequency. The placement
fees were paid under a contract between the assessee and the cable operators or
multi system operators. Considering the nature of transactions, the payments
were not in the nature of commission or royalty.

 

ii)  Commissioner (Appeals) had
found that by agreeing to place the channel on any preferred band, the cable
operator did not render any technical service to the distributor or television
channel. He had rightly found that if the contract was executed for
broadcasting and telecasting the channels of the assessee, the payment was
covered by section 194C as it fell within clause (iv) of the definition of
“work”. Therefore, when placement charges were paid by the assessee to the
cable operators and multi system operators for placing the signals on a
preferred band, it was a part of work of broadcasting and telecasting covered
by sub-clause (b) of clause (iv) of the Explanation to section 194C. It was
found that by an agreement to place the channel on a prime band by accepting
placement fees, the cable operator or multi system operator did not render any
technical services. The Commissioner (Appeals) had recorded detailed findings
on the basis of material on record.

 

iii)  Regarding subtitling
charges also, the finding of fact recorded by the Commissioner (Appeals), which
was confirmed by the Tribunal, was that the work of subtitling was also covered
by the definition of “work” in sub-clause (b) of clause (iv) of the Explanation
to section 194C which covered the work of broadcasting or telecasting including
production of programmes for such broadcasting and telecasting and that the
work of subtitling was part of production programmes.

 

iv) The findings of fact
recorded by the appellate authorities and the view taken by the Tribunal were
justified. No question of law arose.”

43 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2014-15 – Condition precedent – No specific finding that conduct of assessee amounted to concealment of particulars of income or furnishing inaccurate particulars of income – Assessee not found to have furnished inaccurate particulars but making incorrect claim of rebate – Voluntary withdrawal of claim pursuant to notice – No concealment of income – Order imposing penalty unsustainable

Gopalratnam Santha Mosur vs. ITO; 399 ITR
155 (Mad):

 

The relevant year is A. Y. 2014-15. The
assessee sold an immovable property and paid the entire capital gains tax
applicable in respect of the transaction. Thereafter she claimed 50% of the
capital gains tax as rebate under DTAA between India and Canada. The Assessing
Officer issued a notice proposing to disallow the claim for rebate. In
response, the assessee submitted a revised income computation statement,
withdrawing the claim to the rebate and requesting the Assessing Officer to
give effect to the revised tax payable and issue the refund. The assessment
order was passed considering the revised statement. The Assessing Officer also
imposed a penalty of Rs. 23,31,787 u/s. 271(1)(c) of the Act for concealment of
income.

 

The assessee filed a writ petition
challenging the order of penalty. The Madras High Court allowed the writ
petition and held as under:

 

“i)  Until and unless the
authority had rendered a specific finding that the conduct of the assessee
amounted to concealment of particulars of her income or had furnished
inaccurate particulars of such income, the provisions of section 271(1)(c)
could not be invoked. The Assessing Officer had to form an opinion that it was
a case where penalty proceedings had to be initiated and reasons were required
to justify and order imposing penalty.

 

ii)  The basic parameters had
not been fulfilled. In response to the notice, the assessee had submitted a
reply stating that after she was served notice u/s. 143(2), she had furnished
all the required documents called for during the course of assessment and that
the Assessing officer had asked for the details on the rebate claimed by her
according to the DTAA and in response to the show-cause notice, the assessee
had mentioned that she had inadvertently claimed a rebate of 50% on the total
tax payable and had submitted a revised computation withdrawing the rebate
claimed. The assessee had filed a revised computation statement and
accordingly, the assessment was completed.

 

iii)  Thus, the withdrawal of
the rebate claim was voluntary and could not be brought within the expression
concealment of particulars or furnishing inaccurate particulars. There was no
concealment of income nor submitting of inaccurate information, as all the
relevant details were furnished by the assessee. There had been no
misrepresentation of the facts to the Assessing Officer and that the
inadvertent claim to rebate on the tax liability which had admittedly been paid
in the other country showed that the intention of the assessee was not to
furnish inaccurate particulars or conceal her income.

 

iv) The Assessing Officer had
not rendered any finding that the details supplied by the assessee in her
return were erroneous or false or that a mere claim for rebate amounted to
furnishing of inaccurate particulars. Thus the order passed u/s. 271(1)(c)
levying penalty was unsustainable.”

 

42 Section 144C – International transactions – Assessment – A. Y. 2009-10 – Draft assessment order – Final assessment order giving effect to directions of DRP – AO not entitled to introduce new disallowance not contemplated in draft assessment order

CIT vs. Sanmina SCI India P. Ltd.; 398
ITR 645 (Mad):

 

Pursuant to a reference u/s. 92CA(1) of the
Act, an order of transfer pricing determining the arm’s length price (ALP) of
international transactions was passed by the Transfer Pricing Officer (TPO)
culminating in an order of draft assessment u/s. 143(3) r.w.s. 144C(1) of the
Act. The assessee filed objections before the Dispute Resolution Penal (DRP)
against the draft assessment order. The DRP issued directions in relation to
the transfer pricing adjustment as well as claim to relief u/s. 10A of the Act.
Effect was given to the directions of the DRP. While doing so the Assessing
Officer introduced a new disallowance not contemplated in the draft order of
assessment being the aggregation of income or loss from variations, sources
under the same head of income prior to allowance of relief u/s. 10A and since
the aggregation resulted in a loss, he did not allow relief u/s. 10A of an
amount of Rs. 2.98 crore. The returned loss of an amount of Rs. 19,14,03,268
was thus reduced to the extent of deduction u/s. 10A of an amount of Rs. 2.98
crore. The Tribunal set aside the adjustment effected by the Assessing Officer
in relation to treatment of brought forward losses prior to allowance of
deduction u/s. 10A of the Act. The Department was directed to grant deduction
prior to effecting adjustment of brought forward losses.

 

On appeal by the Revenue, the Madras High
Court upheld the decision of the Tribunal and held as under:

 

“i)  The scheme of section 144C
would be wholly violated if the Assessing Officer takes it upon himself to
include in the final order of assessment additions, disallowances or variations
that do not form part of the order of draft assessment. The powers of an Assessing
Officer u/s. 144C(13) have clearly been limited to giving consequence to the
directions of the DRP and cannot extend any further. Any attempt by the
Assessing Officer to delve beyond would result in great prejudice to an
assessee in the light of the express stipulation that no opportunity is to be
provided and an interpretation to further such a conclusion would be wholly
unacceptable and contrary to law.

 

ii)  Acceptance of the
proposition advanced by the Department would amount to giving leave to the
Assessing Officer to pass more than one order of assessment in the course of a
single proceeding, which was not envisaged in the scheme of the Act. Subsequent
assessments either rectifying, revising or reopening the original assessment
were permitted by exercising specified powers under different statutory
provisions. The order of draft assessment u/s. 144C(1) was for all intents and
purposes is an order of original assessment though in draft form.

 

iii)  The order of Tribunal to
this effect was right in law and called for no interference. The variation in
the order of final assessment relating to the priority of set off of losses was
purely misconceived and was in excess of jurisdiction by the Assessing Officer
in terms of section 144C(13) of the Act.”

41 u/s. 80-IA(4) – Infrastructure project – Deduction- A. Y. 2003-04 – Development of infrastructure facility – Effect of section 80-IA(4) – Person developing infrastructure facility and person operating it may be different – Both entitled to deduction u/s. 80-IA(4) on portion of gains received

Principal CIT vs. Nila Baurat Engineering
Ltd.; 399 ITR 242 (Guj):

 

The assessee was engaged in the business of
civil construction and installation of various infrastructure projects. For the
A. Y. 2003-04, the assessee had claimed deduction u/s. 80-IA(4) of the Act, and
the same was allowed by the Assessing Officer. Subsequently, the Assessing
Officer issued notice u/s. 148 for reassessment on the ground that after
completion of the construction work, the assesee had assigned the task of
maintenance and toll collection of the road to one RTIL and hence the deduction
u/s. 80-IA(4) had been granted erroneously. Accordingly, the deduction was
disallowed in the reassessment order. The Tribunal held that the assessee was
entitled to deduction u/s. 80-IA(4).

 

On appeal by the Revenue, the Gujarat High
Court upheld the decision of the Tribunal and held as under:

 

“i)  Under sub-section (4) of
section 80-IA of the Act, an enterprise carrying on the business of developing,
or operating and maintaining, or developing, operating and maintaining
infrastructure facility would be eligible for deduction. Thus, this provision
itself envisages that in a given project the developer and the person maintains
and operates may be different. Merely because the person maintaining and
operating the infrastructure facility is different from the one who developed
it, that would not deprive the developer of the deduction under the section on
the income arising out of such development.

 

ii)  By virtue of the operation
of the proviso, the developer would not be deprived of the benefit of deduction
under sub-section (1) of section 80-IA on the profit earned by it from its
activity of developing the infrastructure. The proviso does not operate to
deprive the developer of the benefit of the deduction even after the facility
is transferred for the purpose of maintenance and operation but the profit
element would be split into one derived from the development of the
infrastructure and that derived from the activity of maintenance and operation
thereof.

 

iii)  The assessee having
transferred the facility for the limited purpose of maintenance and operation
to RTIL, it would receive a fixed payment of Rs. 328 lakh per annum
irrespective of the toll collection by RTIL. This profit element therefore
would be relatable to the infrastructure development activity of the assessee
and would qualify for deduction u/s. 80-IA of the Act. RTIL would have a claim
for deduction on its profit arising out of maintenance and operation of
infrastructure facility which apparently would exclude the pay out of RS. 328
lakh to the assessee.”

40 U/s. 80-IB(10)(a) – . Housing project – Deduction – Completion certificate – Assessee completing construction and applying for certificate of completion before stipulated date – Delay in issuance of completion certificate beyond control of assessee – Assessee entitled to deduction

Principal CIT vs. Ambey Developer P.
Ltd.; 399 ITR 216 (P&H):

 

The assessee was a builder. For the A. Y.
2010-11, the assesee claimed deduction u/s. 80IB(10)(a) of the Act,  in respect of the housing project completed
by it in the relevant year. The assessee had filed a completion certificate
from the Municipal Town Planner dated 30/12/2011 with a letter written to the
Commissioner dated 29/03/2010 for completion certificate. The Assessing Officer
held that the housing project approved on 01/04/2005 should have been completed
within five years from the end of the month in which it was approved, i.e.
31/03/2010. The Assessing Officer disallowed the claim for deduction u/s.
80IB(10) of the Act and added it back to the assessee’s taxable income. The
Commissioner (Appeals) allowed the deduction holding that delay in issuance of
the completion certificate was beyond the control of the assessee and was not
attributable to him. The Tribunal confirmed this.   

 

On appeal by the Revenue, the Punjab and
Haryana High Court upheld the decision of the Tribunal and held as under:

 

“i)  Though the words used in
clause (ii) of the Explanation to section 80-IB(10)(a) is “shall”, but it would
not necessarily mean that in every case, it shall be taken to be a mandatory
requirement. It would depend upon the intent of the Legislature and not the
language in which the provision is clothed. The meaning and the intent of the
Legislature would be gathered not on the basis of the phraseology of the
provision but taking into consideration its nature, its design and the
consequences which would follow from interpreting it in a particular way alone.

 

ii)  The purport of clause (ii)
of the Explanation to section 80-IB(10)(a) of the Act is to safeguard the
interests of the Revenue wherever the construction has not been completed
within the stipulated period. Thus, it cannot mean that the requirement is
mandatory in nature and would disentitle an assessee to the benefit of  section 80-IB(10)(a) of the Act even where
the assessee had completed the construction within the stipulated period and
had made an application to the local authority within the prescribed time. The
issuance of the requisite certificate is within the domain of the competent
authority over which the assessee has no control.

 

iii)  The construction was
completed before the stipulated date, i.e., 31/03/2010 and the certificate of
completion was applied on 29/03/2010 and was issued to the assessee on
31/12/2011. The assessee in such circumstances could not be denied the benefit
of section 80-IB(10)(a) of the Act.”

39 U/s. 80-IC – Deduction An ‘undertaking or an enterprise’ established after 07/01/2003, and carried out ‘substantial expansion’ within specified window period, i.e., between 07/01/2003 and 01/04/2012, would be entitled to deduction on profits at rate of 100 per cent, u/s. 80-IC post said expansion

Stovekraft India vs. CIT; [2017] 88
taxmann.com 225 (HP)

 

The assessee started its business activity
with effect from 06/01/2005 and treating the F. Y. 2005-2006 (A. Y. 2006-2007),
as initial assessment year, claimed deduction on profits at the rate of 100 per
cent u/s. 80-IC of the Act.  Sometime in
the F. Y. 2009-10, the assessee carried out ‘substantial expansion’ of the
‘Unit’ and by treating the said Financial Year to be the ‘initial assessment
year’, further claimed deduction at the rate of 100 per cent, instead of 25 per
cent, u/s. 80-IC. The Assessing Officer denied the claim of deduction at the
rate of 100 per cent with effect from Financial Year 2009-10 after undertaking
‘substantial expansion’, so carried out holding that the assessee was not
entitled to deduction not at the rate of 100 per cent but on reduced basis at
the rate of 25 per cent, as provided u/s. 80-IC. He concluded that only such of
those units, existing prior to incorporation of section 80-IC in the statute,
i.e. 07/01/2003, could undertake substantial expansion and units established
subsequent to the said date being termed as ‘new industrial units’ were
ineligible for exemption u/s. 80-IC, even though they might had carried out any
expansion, substantial or otherwise. He held that, for the purpose of section
80-IC, the assessee can have only one assessment year as initial assessment
year. The Tribunal upheld the decision of the Assessing Officer.

 

On appeal by the assessee, the Himachal Pradesh
High Court reversed the decision of the Tribunal and held
as under:

 

“i)  What is of importance is
the stipulation under sub-clause (ii) of clause (b) of sub-section 2 of section
80-IC, insofar as State of Himachal Pradesh is concerned. If between 07/01/2003
and 01/04/2012, a ‘Unit’ has ‘begun’ or ‘begins’ to manufacture or produce any
article or thing, specified in the Fourteenth Schedule or commences any
operation ‘and undertakes substantial expansion’ during the said period, then
by virtue of sub-section (3), it shall be entitled to deduction at the rate of
100 per cent of profits and gains for five assessment years, commencing from
‘initial assessment year’ and thereafter at the rate of 25 per cent of the
profits and gains. The only restriction being that such substantial expansion
is not formed by splitting up, or reconstruction, of the business already in
existence. At this stage, it is noted that under sub-section (6) of section
80-IC, there is a cap(10 years) with regard to the total period for which a
‘Unit’ is entitled to such deduction.

 

ii)  Can there be more than one
‘initial assessment year’, as the authorities below have held it not to be so?
Clause (v) of sub-section (8) of section 80-IC, defines what is an ‘initial
assessment year’. It is only for the purpose of this section. Now, ‘initial
assessment year’ has been held to mean the assessment year relevant to the
previous year in which the ‘Unit’ begins to manufacture or produce article or
thing or commences operation or completes substantial expansion. Significantly,
the Act does not stipulate that only units established prior to 07/01/2003
shall be entitled to the benefits u/s. 80-IC. The definition of ‘initial
assessment year’ is disjunctive and not conjunctive. The initial assessment year
has to be subsequent to the year in which the ‘Unit’ completes substantial
expansion or commences manufacturing etc., as the case may be.

 

iii)  A bare look at Explanation
(b) of section 80-IB (11C) and section 80-IB(14)(c) would reflect that, earlier
[till section 80-IC was inserted with effect from 01/04/2004], ‘substantial
expansion’ was not included in the definition of ‘initial assessment year’.
Earlier definition had used words ‘starts functioning’, ‘company is approved’,
‘commences production’, ‘begins business’, ‘starts operating’, ‘begins to
provide services’. But section 80-IC (8)(v) changed wordings [of ‘initial
assessment year’] to ‘begins to manufacture’, ‘commences operation’, or
‘completes substantial expansion’. Thus, legislature consciously extended the
benefit of ‘initial assessment year’ to a unit that completed substantial
expansion.

iv) This is absolutely in
conjunction and harmony with clause (b) of sub-section (2) of section 80-IC,
which postulates  two things – (a) an
undertaking or an enterprise has ‘begun’, it is in the past tense or (b)
‘begins’, which is in presenti. Significantly, what is important is the
word ‘and’ prefixed to the words ‘undertakes substantial expansion’ during the
period 07/01/2003 to 01/04/2012.

 

v)  Words ‘commencing with the
initial Assessment Year’ are relevant. It is the trigger point for entitling
the unit, subject to the fulfillment of its eligibility for deduction at the
rate of 100 per cent, for had it not been so, there was no purpose or object of
having inserted the said words in the section. If the intent was only to give
100 per cent deduction for the first five years and thereafter at the rate of
25 per cent for next five years, the Legislatures would not have inserted the
said words. They would have plainly said, ‘for the first initial five years a
unit would be entitled to deduction at the rate of 100 per cent and for the
remaining five years at the rate of 25 per cent’.

 

vi) Thus, the question, which
further arises for consideration, is as to whether, it is open for a ‘Unit’ to
claim deduction for a period of ten years at the rate of 100 per cent or not.
It is legally permissible. The statute provides for the same.

 

vii) Also, ‘substantial
expansion’ can be on more than one occasion. Meaning of expression ‘substantial
expansion’ is defined in clause (8(ix)) of section 80-IC and with each such
endeavour, if the assessee fulfils the criteria then there cannot be any
prohibition with regard thereto. For what is important is not the number of
expansions, but the period within which such expansions can be carried out
within the window period [07/01/2003 to 01/04/2012], and it is here the words
‘begun’ or ‘begins’ and ‘undertakes substantial expansion’ during the said
period, as stipulated under clause (b) sub-section 2 of section 80-IC, to be of
significance. The only rider imposed is by virtue of sub-section (6) of section
80-IA, which caps the deduction with respect to assessment years to which a
unit is entitled to.

 

viii)The Act does not create distinction between the old units,
i.e., the units which stand established prior to 07/01/2003 (the cutoff date),
and the new units established thereafter. Artificial distinction sought to be
inserted by the revenue, only results into discrimination. The object, intent
and purpose of enactment of the section in question is only to provide
incentive for economic development, industrialisation and enhanced employment
opportunities. The continued benefit of deduction at higher rates is available
only to such of those units, which fulfil such object by carrying out
‘substantial expansion’.

 

ix) Both the Assessing Officer
as well as the Appellate Authority(s)/Tribunal erred in not appreciating as to
what was the intent and purpose of insertion of section 80-IC. Thus, in view of
the above discussion, these appeals are allowed and orders passed by the
Assessing Officer as well as the Appellate Authority and the Tribunal, in the
case of each one of the assessees, are quashed and set aside, holding as under:

 

a)  Such of those undertakings
or enterprises which were established, became operational and functional prior
to 07/01/2003 and have undertaken substantial expansion between 07/01/2003 upto
01/04/2012, should be entitled to benefit of section 80-IC, for the period for
which they were not entitled to the benefit of deduction u/s. 80-IB.

 

b)  Such of those units which
have commenced production after 07/01/2003 and carried out substantial
expansion prior to 01/04/2012, would also be entitled to benefit of deduction
at different rates of percentage stipulated u/s. 80-IC.

 

c)  Substantial expansion
cannot be confined to one expansion. As long as requirement of section
80-IC(8)(ix) is met, there can be number of multiple substantial expansions.

 

d)  Correspondingly, there can
be more than one initial assessment years.

 

e)  Within the window period of
07/01/2013 upto 01/04/2012, an undertaking or an enterprise can be entitled to
deduction at the rate of 100 per cent for a period of more than five years.

f)   All this, of course, is
subject to a cap of ten years. [Section 80-IC(6)].”

38 Sections 2(15) and 11 – Charitable trust – Exemption – A. Ys. 2010-11 and 2011-12 – Charitable purpose – Effect of insertion of proviso in section 2(15) – Trust running educational institutions – purchase of land for charitable purposes – inability to utilise land for charitable purpose – Sale of land in plots – sale consideration utilised for charitable purposes – Assessee entitled to exemption –

CIT vs. Sri Magunta Raghava Reddy
Charitable Trust; 398 ITR 663 (Mad):

 

The assessee was a trust running educational
institutions. It purchased lands to an extent of 71.89 acres in the year
1986-87 for the purpose of setting up a medical college and old age home. The
assessee could not obtain the necessary permissions from the competent
authorities and accordingly the said land could not be utilised for the said
purpose. Therefore, the assessee divided the land into plots and sold the plots
and received profits in different years. The profit was utilised for the
charitable purposes. For the A. Ys. 2010-11 and 2011-12, the Assessing Officer
brought to tax, a sum under the head, ”income from business”. The Tribunal held
that the assessee was entitled to exemption u/s. 11.

 

On appeal by the Revenue, the Madras High
Court upheld the decision of the Tribunal and held as under:

 

“i)  Merely because the lands
were sold from 1994 onwards, and fetched a higher value, it could not be said
that it was only for profit motive. When there was no prohibition in the
Income-tax Act, 1961, restraining unutilised land to be sold in smaller extent,
such activity of the assessee, could not be construed as predominant business
activity.

 

ii)  The material on record
further disclosed that the sale proceeds of the lands were utilised only for
charitable purposes and not diverted. Even going by the subsequent conduct of
the assessee in utilizing the profits earned, only for charitable purposes, it
was evident that the intention of the assessee was not to engage continuously
in business or trade or commerce. The assessee was entitled to exemption u/s.
11.”

37 Sections 10A, 10B, 254 and 263 – Appellate Tribunal Power to direct consideration of alternative claim – A. Y. 2010-11 – Revision – Commissioner directing withdrawal of exemption u/s. 10B – Appeal against order of Commissioner refusing to consider claim u/s. 10A – Tribunal has power to direct consideration of alternative claim of assessee to exemption u/s. 10A

CIT vs. Flytxt Technology P. Ltd.; 398
ITR 717 (Ker):

 

For the A. Y. 2010-11, the Assessing Officer
had allowed the assessee’s claim for exemption u/s. 10B of the Income-tax Act,
1961 (Hereinafter for the sake of brevity referred to as the “Act”).
The Commissioner invoked his jurisdiction u/s. 263 of the Act and held that the
assessee was not entitled to exemption u/s. 10B of the Act and directed the
Assessing Officer to withdraw the exemption granted u/s. 10B. The assessee
raised an alternative claim for exemption u/s. 10A of the Act. The commissioner
refused to consider the assessee’s claim. The Tribunal directed the Assessing
Officer to decide the issue afresh including the claim of the assessee for the
benefit of section 10A. 

 

On appeal by the Revenue, the Kerala High
Court upheld the decision of the Tribunal and held as under:

 

“i)  Section 254 of the Act
obliged the Tribunal to consider the appeal and pass such orders thereon as it
thinks fit. Even if the power conferred on the Commissioner u/s. 263 only
authorised him to examine whether the order passed by the Assessing Officer was
erroneous and prejudicial to the interest of the Revenue, that restriction of
the power could not affect the powers of the Tribunal which was bound to
exercise u/s. 254 of the Act.

 

ii)  Therefore, there was no
illegality in the order passed by the Tribunal.”

11 Section 37(1) – Business expenditure – Capital or revenue – A. Ys. 2008-09 and 2009-10 – Assessee obtaining mining lease from Government – Writ petitions to quash lease – Legal expenditure to defend and protect lease – Is revenue expenditure

Dy. CIT vs. B. Kumara Gowda; 396 ITR 386
(Karn):

The assessee was in the business of mining
iron ore in lands taken on lease from the State Government. In the year 2006,
the Department of Geology had leased out certain lands to the assessee for the
purpose of mining iron ore. The assessee was working on the lease as a lessee
of the State Government. The grant of lease to the assessee was challenged by
third parties in writ petitions. In the A. Ys. 2008-09 and 2009-10, the
assessee incurred expenditure by way of legal fees to defend and sustain the
lease. The assessee claimed deduction of the expenditure as revenue
expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed
the assessee’s claim.

On appeal by the Revenue, the Karnataka High
Court upheld the decision of the Tribunal and held as under:

 “i)  The test to decide whether
a particular expenditure is capital or revenue in nature, is to see whether the
expenditure in question was incurred to create any new asset or was incurred
for maintaining the business of the company. If it is former, it is capital
expenditure; if it is later, it is revenue expenditure.

 ii)  The legal expenditure
incurred by the assessee to defend the writ petitions filed to quash the
Government notification and lease deed was not a capital expenditure and
deduction was allowable.”

33. Export – 100% export oriented unit – Exemption u/s. 10A – A. Y. 2002-03- Electronic transmission of software developed in India branch to head office outside India at markup 15% over cost – Is export eligible for exemption u/s. 10A-

Dy DIT vs. Virage Logic International; 389
ITR 142 (Del):

The assessee was a 100% export oriented unit
which developed software and electronically transmitted to its head office
located abroad at a markup of 15% over the cost. For the A. Y. 2002-03 the
assessee’s claim for deduction u/s. 10A of the Act was rejected by the
Assessing Officer holding that the transfer of software by the assessee did not
amount to export. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

“i)   Mere omission of a
provision akin to section 80HHC(2), Explanation 2 or the omission to make a
provision of a similar kind that encompassed Explanation 2(iv) to section 10A
of the Income-tax Act, 1961 by itself did not rule out the possibility of
treatment of transfer or transmission of software from the branch office to the
head office as an export.

ii)   According to section
80IA(8) the transfer of any goods “for the purpose of eligible business” to
“any other business carried on by the assessee” was covered. The incorporation
in its entirety without any change in the provision of section 80IA(8) in
section 10A through sub-section (7) was for the purpose of ensuring that inter
branch transfers involving exports were treated as such, as long as the other
ingredients for a sale were satisfied.

iii)   The absence of a “deemed
export” provision in section 10A similar to the one in section 80HHC did not
logically undercut the amplitude of the expression “transfer of goods” u/s.
80IA(8) which was part of section 10A. Such an interpretation would defeat section
10A(7). The transfer of computer software by the Indian branch to the head
office was entitled to claim benefit of section 10A of the Act.”

32. Co-operative society – Deduction u/s. 80P – A. Ys. 2008-09, 2009-10 and 2011-12 – Effect of amendment w.e.f. 01/04/2007 – Deduction denied to co-operative banks – Difference between co-operative bank and primary agricultural credit society – Primary agricultural credit society is entitled to deduction u/s. 80P

CIT vs. Veerakeralam Primary Agricultural
Co-operative Credit Society; 388 ITR 492 (Mad):

Assessee is a primary agricultural
co-operative credit society. For the A. Ys. 2008-09, 2009-10 and 2011-12, the
Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P on the
ground that assessee is a co-operative bank. The Tribunal allowed the assesee’s
claim.

On appeal by the Revenue, the Madras High
Court upheld the decision of the Tribunal and held as under:

“i)   The benefit of section
80P is excluded for co-operative banks, whereas the primary agricultural credit
societies are entitled to the deduction.

ii)   The primary object of the
assessee-society was to provide financial accommodation to its members to meet
all the agricultural requirements and to provide credit facilities to the
members, as per the bye-laws and as laid down in section 5(cciv) of Banking
Regulation Act, 1949.

iii)   The assessee society was
admittedly not a co-operative bank but a credit co-operative society. It was
entitled to deduction u/s. 80P.”

31. Charitable purpose – Computation of income- Depreciation – Sections 11 and 32 – A.Y. 2009 -10 – Asset whose cost allowed as application of income u/s. 11- Depreciation allowable – Section 11(6) denying depreciation on such assets inserted w.e.f. 01/04/2015 – Amendment not retrospective- Depreciation allowable for A. Y. 2009-10

CIT vs.
Karnataka Reddy Janasangha; 389 ITR 229 (Karn):

Dealing with the amendment inserting section
11(6) of the Income-tax Act, 1961 w.e.f. 01/04/2015, the Karnataka High Court
held as under:

“For assessment years prior to the
introduction of section 11(6) of the Income-tax Act, 1961. i.e. prior to April
1, 2015, depreciation is allowable on assets, where cost of such assets has
already been allowed as application of income in the year of
acquisition/purchase of asset.”

30. Charitable purpose – Computation of Income- Depreciation – Sections 11 and 32(1) – A. Y. 2004-05 – Assets whose cost allowed as application of income to charitable purposes in earlier years – Depreciation is allowable on such assets

CIT vs. Krishi Upaj Mandi Samiti; 388 ITR
605 (Raj):

The assessee was a charitable trust eligible
for exemption u/s. 11. The assessee had availed exemption u/s. 11 in respect of
an asset being building. In the A. Y. 2004-05, the Assessing Officer disallowed
the assessee’s claim for depreciation on the said building on the ground that
exemption has been availed u/s. 11 on investment in the said building. The
Tribunal allowed the assessee’s claim.  

On appeal by the Revenue, the Rajasthan High
Court upheld the decision of the Tribunal and held as under:

“i)   In computing the income
of a charitable institution or trust depreciation of assets owned by such
institution is a necessary deduction in commercial principles, hence the amount
of depreciation has to be deducted to arrive at the income.

ii)   The Appellate Tribunal
rightly allowed depreciation claimed by the assessee on capital assets for
which capital expenditure was already allowed in the year under consideration.

iii)   The income of a
charitable trust derived from the depreciable heads was also liable to be
computed on commercial basis. The assessee was a charitable institution and its
income for tax purposes was required to be determined by considering the
provisions of section 11 of the Act, after extending normal depreciation and
deductions from its gross income.

iv)  In computing the income of
a charitable institution depreciation of assets owned by it was a necessary
deduction on commercial principles, hence, the amount of depreciation had to be
deducted to arrive at the income.”

29. Capital gain – Section 47 – Where no gain or profit arises at time of conversion of partnership firm into a company, in such a situation, notwithstanding non-compliance with clause (d) of proviso to section 47(xiii) by premature transfer of shares, transferee company is not liable to pay capital gains tax

CIT vs. Umicore Finance Luxemborg; [2016]
76 taxmann.com 32 (Bom):

The assessee was a non-resident company
incorporated under the laws of Luxembourg. It purchased entire shareholding of
an Indian company ‘A’. The company ‘A’ was incorporated as a private limited
company succeeding erstwhile firm ‘AZ’. On the date of the conversion, the
partners of the erstwhile firm continued as shareholders having shareholding
identical with profit sharing ratio of the partners. The assessee filed an
application before the AAR seeking a ruling on question as to whether
notwithstanding the non-compliance with clause (d) of proviso to
section 47(xiii), it was liable to pay capital gain tax. The AAR noted
that the assessee had clarified that whilst converting the partnership firm
into a company, there was no revaluation of the assets and the assets and
liabilities of the firm as also the partners, capital and current accounts were
taken at their book value in the accounts of the company. It was in such
circumstances the AAR ruled that notwithstanding premature transfer of shares
as specified in clause (d) of proviso to section 47(xiii),
the assessee-company was not liable to pay capital gain tax.

On a writ petition filed by the Department
challenging the said order of the AAR, the Bombay High Court held
as under:

“i)   The AAR noted that
section 47(xiii) specifically excludes different categories of transfers
from the purview of capital gains taxation but it is subject to fulfilling the
conditions laid down in clauses (a) to (d). The fact that
conditions (a) to (c) are satisfied, is not in dispute but,
however, the question is whether clause (d) requires to be satisfied.
The AAR has rightly pointed out that the first part of clause (d) has
been satisfied but, however, it is noted by the AAR the requirements of second
part of clause (d) i.e. the shareholding of 50 % or more should continue
to be as such for the period of five years from the date of succession, has not
been fulfilled in the instant case by reason of the transfer of shares by the
Indian Company to the assessee before the expiry of five years.

ii)   The AAR has also noted
that the consequences of violation of those conditions have been specifically
laid down in sub-section (3) of section 47A which was also introduced by the
same Finance Act. It is further pointed out that if no profit or gains arose
earlier when the conversion of the firm into a Company took place or if there was no transfer at all of the capital assets of the firm at
the point of time, the deeming provision u/s. 47A(3) cannot be inducted to levy
the capital gain tax.

iii)   The AAR further found
that the shares allotted to the partners of the existing firm consequent upon
the registration of the firm as a Company, did not give rise to any profit or
gains. It is further noted that by such reconstitution of the Company under
part IX of the Companies Act, the assets automatically gets vested in the newly
registered Company as per the statutory mandate contained u/s. 575 of the
Companies Act. It is further found that it cannot be said that the partners
have made any gains or received any profits assuming that there was a transfer
of capital assets. It was also noted that worth of the shares of the company
was not different from the interest of partners in the existing firm.

iv)  On perusal of the said
observations, it is opined that AAR in a very reasoned order, has taken a view
that no capital gains accrued or attracted at the time of conversion of the
partnership firm into a private limited company. In part IX of the Companies
Act, therefore, notwithstanding the non-compliance with clause (d) of
the proviso to section 47(xiii) by premature transfer of shares, the
said Company is not liable to pay capital gains tax. These findings have been
arrived at essentially looking into the fact that there was no revaluation of
assets at the time of conversion of the firm ‘AZ’.

v)   The said finding of fact
has not been disputed by the revenue and, as such, the finding of the AAR that
there was no capital gains in the transaction in question cannot be faulted. It
is also to be noted that even immediately after such conversion in question
from the partnership firm into a private limited company, the assessment with
regard to the income of the new company as well as of the respective partners
were carried out and there was no objection or grievances raised by the
Assessing Officer that any capital gains tax had to be paid on account of the
incorporation of the company in terms of the said provisions.

vi)  The transfer of shares in
favour of the assessee by the erstwhile partners who were shareholders of ‘A’
Ltd. and such partners/shareholders are liable to pay capital gains even if
acceptable, would not affect the decision passed by the AAR whilst coming to
the conclusion that there were no capital gains at the time of incorporation of
the new company by the said partnership firm.

vii)  The contention of the
revenue that in view of the violation of clause (d) of section 47(xiii),
the exemption from capital gains enjoyed by the assessing firm upon conversion
into a private limited company, ceases to be in force cannot be accepted. There
are no capital gains which have accrued on account of such incorporation. In
such circumstances, the said contention of the revenue that in view of the
transfer of the capital assets or intangible assets, there are capital gain tax
payable by the transferee company, cannot be accepted. As pointed out
hereinabove, there was no capital gains payable at the time of the
incorporation of the company from the erstwhile partnership firm.

viii) The next contention of
the revenue is that the application u/s. 245N of the assessee itself was not
maintainable. The main submission on that aspect is that the assessee not being
parties to the transaction, the question of seeking an advance ruling at the
instance of the assessee is not covered under clauses (i), (ii)
and (iii) of section 245N(a). Looking into the question as to whether
capital gains are liable to be paid or not in terms by the transferee company
being a non-resident company, the respondent herein, would be a matter which
would come within the scope of advance ruling.

ix   Considering the aforesaid
observations and taking note of the findings of the AAR, it is held that there
is no case made out for interference by the Court under article 226 of the
Constitution of India. As such, the petition stands rejected.”

36. Housing project – Deduction u/s. 80IB(10) – A. Y. 2006-07 – Ceiling on built up area – terrace in pent house is not part of built up area – Finding that assessee was developer and built up areas were within specified limits – Assessee entitled to deduction u/s. 80IB(10)

CIT vs. Amaltas Associates; 389 ITR 175
(Guj):

The assessee had developed a housing
project. In the A. Y. 2006-07, the assessee claimed deduction u/s. 80IB(10) in
respect of the profits from the said housing project. The Assessing Officer
disallowed the claim on two grounds. Firstly, he held that the assessee is not
a developer but a contractor. Secondly, he held that the condition for built up
area is not satisfactory. He included the terrace area into the built up area.
The Tribunal held that the assessee was a developer and that the terrace area
is not to be included into the built up area. The Tribunal accordingly held
that the condition of built up area is satisfactory. Accordingly, the Tribunal
allowed the claim for deduction u/s. 80IB(10) of the Act.

On appeal by the Revenue, the Gujarat High
Court upheld the decision of the Tribunal and held as under:

“i)   The Tribunal had found
that the assessee was a developer. The assessee had undertaken full
responsibility of constructing the residential units and had also been
responsible for the resultant profit or loss arising out of such venture. The
assessee, thus, had undertaken full risk.

ii)   The Tribunal had rightly held
that the open space attached to a pent house cannot be included in the term
“balcony”. The Tribunal was right in law and on facts in allowing deduction
claimed by the assessee u/s. 80IB(10) of the Act.”

35. Salary – Voluntary retirement – Exemption u/s. 10(10C) – Where assessee who had opted for voluntary retirement under Early Retirement Option Scheme on coming to know and on being advised that pursuant to a decision of Supreme Court would be entitled to exemption u/s. 10(10C) filed a revised return claiming deduction u/s. 10(10C), he would be entitled to exemption even though revised return had been filed beyond period stipulated u/s. 139(5) as default in complying with requirement being due to circumstances beyond control of assessee, Board would be entitled to relax requirement contained in Chapter IV or Chapter VI

S. Sevugan Chettiar vs. Princ. CCIT;
[2016] 76 taxmann.com 156 (Mad):

The petitioner is a retired employee of the
ICICI Bank and was aged 68 years. He was constrained to approach this Court in
terms of the proceedings dated 04/08/2016 issued by the third respondent. The
petitioner, upon retirement, filed his return of income for the relevant year
and the assessment was finalized. Subsequently, the petitioner came to know
that the Hon’ble Supreme Court, in the case of S. Palaniappan vs. I.T.O.
[Civil Appeal No. 4411 of 2010 dated 28/09/2015] held that a person, who has
opted for voluntary retirement under the Early Retirement Option Scheme shall
be entitled to exemption u/s. 10(10C). Following the said decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Hon’ble
Supreme Court be brought to the notice of all officials in the respective
jurisdiction so that relief may be granted to such retirees of the ICICI Bank
under Early Retirement Option Scheme, 2003. The petitioner, on coming to know
of the same, filed a revised return by referring to the said decision and
stating that only after the said decision came to his notice, he had been
advised to file the revised return. However, this has been rejected vide
the impugned proceedings dated 04/08/2016 by the third respondent by referring
to section 139(5) of the Act. In other words, the revised return was refused to
be accepted as it is beyond the time stipulated u/s. 139(5). Assailing the
correctness of the order of the third respondent, the petitioner writ petition
before the Madras High Court. 

The Madras High Court allowed the writ
petition and held as under:

“i)   After hearing the learned
counsel for the parties and perusing the materials placed on record, this Court
is of the view that the technicality should not stand in the way while giving
effect to the order passed by the Hon’ble Supreme Court. The Board also issued
a circular on 13/04/2016 with a view to grant relief to the retirees of the
ICICI Bank under the Early Retirement Option Scheme. Several persons, who had
filed writ petitions before the Madurai Bench of this Court, have been granted
the relief. In fact, in those orders, the Court took into consideration the
decision of the Hon’ble Supreme Court and granted the relief.

ii)   The circular issued by
CBDT is in exercise of the powers conferred u/s. 119 of the Act. The said
provision deals with instructions to Subordinate Authorities. Sub-section (1)
of section 119 of the Act states that the Board may, from time to time, issue
such orders, instructions and directions to other Income Tax Authorities, as it
may deem fit, for the proper administration of the provisions of the Act and
such Authorities and all other persons employed in the execution of this Act
shall observe and follow such orders, instructions and directions of the Board.
The Proviso carves out certain exceptions, under which circumstances, the Board
will not issue instructions.

iii)   Admittedly, the case,
which was considered by the Hon’ble Supreme Court related to an individual
employee namely S. Palaniappan, who was also a similarly placed person as that
of the petitioner. Thus, the Board, in its wisdom, while implementing the judgement
in the case of S. Palaniappan, took a decision that such a benefit
should be extended to the similarly placed persons treating them as class of
cases. Therefore, the Board observed that the order should be communicated to
all the Commissioners, so that relief can be granted to such retirees of the
ICICI Bank. Thus, the petitioner cannot be non-suited solely on the ground that
he had filed a revised return well beyond the period stipulated u/s. 139(5) of
the Act.

iv)  It is relevant to point
out that Clause (c) to sub- section (2) of section 119 of the Act states that
the Board may, if it considers it desirable or expedient so to do for avoiding
genuine hardship in any case or class of cases, by general or special order,
relax any requirement contained in any of the provisions contained in Chapter
IV or Chapter VI-A of the Act, which deal with computation of total income and
deductions to be made in computing the total income and such power is
exercisable where the petitioner failed to comply with any requirement
specified in such provision for claiming deduction thereunder, subject to the
conditions that (i) the default is due to circumstances beyond the control of
the assessee and (ii) the assessee has complied with the requirement before the
assessment in relation to previous year, in which, such deduction is claimed.

v)   Thus, if the default in
complying with the requirement was due to circumstances beyond the control of
the assessee, the Board is entitled to exercise its power and relax the
requirement contained in Chapter IV or Chapter VI-A. If such a power is
conferred upon the Board, this Court, while exercising jurisdiction under
Article 226 of The Constitution of India, would also be entitled to consider as
to whether the petitioner’s case would fall within one of the conditions
stipulated u/s. 119(2)(c).

vi)  Considering the hard
facts, the petitioner, being a senior citizen, cannot be denied of the benefit
of exemption u/s. 10(10C) of the Act and the financial benefit that had accrued
to the petitioner, which would be more than a lakh of rupees. Therefore, this
Court is of the view that the third respondent should grant the benefit of
exemption to the petitioner.

vii)  Accordingly, the writ
petition is partly allowed, the impugned order is set aside and the third
respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order. Considering the
facts and circumstances of the case, the prayer for interest is rejected.”

34. Housing project – Deduction – Sections 40(a)(ia) and 80IB – A. Y. 2006-07 – Disallowance u/s. 40(a)(ia) cannot be treated separately but is to be added to gross total income eligible for deduction u/s. 80IB(10)

CIT vs. Sunil Vishwambharnath Tiwari; 388
ITR 630 (Bom):

The Assessee was eligible for deduction u/s.
80IB(10) and the same was allowed. In the A. Y. 2006-07, the Assessing Officer
made certain disallowances u/s. 40(a)(ia) of the Act, on account of non
deduction of tax at source and also did not allow deduction u/s. 80IB(10) in
respect of the increased income of the project. The Commissioner (Appeals) and
the Tribunal allowed the assessee’s full claim.

On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:

“i)   In view of the scheme of
section 40 deduction of tax at source was not effected by the assessee and
payment to contractors could not be deducted as the expenditure became
inadmissible. The expenditures were added back to the income being eligible
income. This income eligible for deduction in terms of section 80IB(10) only
increased by the figure of disallowed expenditure.

ii)   The Commissioner(Appeals)
had rightly pointed out that the deduction allowable u/s. 80IB(10) of the Act,
was with reference to assessee’s gross total income. Hence disallowance u/s.
40(a)(ia) cannot be treated separately and it got added back to the gross total
income of the asessee.

iii)   Section 40 pointed out
that due to error of the assessee, such expenditure could not be deducted while
computing the income chargeable under the head ”Profit and gains of business or
profession”. That was the only limited effect of the lapse on the part of the
assessee. The Appellate Tribunal had considered these facts and upheld them. No
substantial question of law arose for consideration.”

46. Appellate Tribunal – Power to enhance – Tribunal has no power to enhance assessment

Fidelity Shares and Securities Ltd. vs. Dy. CIT; 390 ITR
267 (Guj):

Dealing with the scope of the power of the Tribunal under the
Income-tax Act, 1961 the Gujarat High Couirt held as under:

“The Tribunal has no power under
the Income-tax Act, 1961 to enhance assessment.”

19. Appellate Tribunal – Power to consider new ground etc. – Sections 142(2A) and (2C) – A. Y. 2005-06 – Tribunal has power to consider the question of validity of extension of time u/s. 142(2C) of the Act – Amendment by Finance Act, 2008 is prospective and not retrospective

Principal CIT vs. Nilkanth Concast P.
Ltd.; 387 ITR 568 (Del):

The relevant year is the A. Y. 2005-06. In
the appeal filed by the Revenue before the Delhi High Court, the following
questions were raised:

“i)  Whether the ITAT is
competent to adjudicate the order of the AO under proviso to section
142(2C), which is not provided u/s. 146A 
or 153?

ii)  Whether the ITAT is
competent to admit an issue for the first time where there is no material in
the assessment order or in the order of the Commissioner of Income-tax
(Appeals) on the basis of quite the issue of validity of the order of the
Assessing Officer under the proviso to section 142(2C) could be raised
and considered?”

iii)  Whether the AO is
competent to extend the period of filing the audit report on the express
request of the nominated auditor under proviso to section 142(2C) r.w.s.
142(2A) ?”

The High Court held as under:

“i)  The powers of the Tribunal
are wide enough to consider a point which may not have been urged before the
Commissioner(Appeals) as long as the question requires to be examined in the
interest
of justice.

ii)  The Tribunal had not
exceeded its jurisdiction in examining the question whether the Assessing
Officer was justified in extending the time for the auditor nominated u/s.
142(2C), to submit the audit report.

iii)  Under proviso to
section 142(2C) of the Act, there was no power with the Assessing Officer to suo
moto extend the time for filing audit report prior to April 1, 2008. The
power was subsequently provided by amending the proviso by the Finance
Act, 2008 and the amendment was prospective in nature.

iv) The Assessing Officer was
not competent to extend the period for filing the audit report on the request
of the nominated auditor. It could be done only on the request made on behalf
of the assessee.”

22. Revision – Section 263 – A. Y. 2007-08 – Assessee changing method of accounting in accordance with accounting standard 7 – Known and recognised method of accounting and approved as proper – Not erroneous and prejudicial to Revenue – Revision not warranted

Princ. CIT vs. A2Z Maintenance and Engineering Services
Ltd.; 392 ITR 273(Del):

The assessee was engaged in the construction business. For
the A. Y. 2007-08, the transactions in its return were accepted in the scrutiny
assessment u/s. 143(3) of the Act. The Assessing Officer noted that the
assessee provided maintenance services such as housekeeping and security
services and accepted the returned income without any disallowance. The
Commissioner issued notice u/s. 263 of the Act taking the view that Rs. 11.98
crore shown as deferred revenue income by changing the method of accounting in
accordance with Accounting Standard (AS)-7 resulted in lowering of profit. The
Commissioner finally made the order revising the assessment as erroneous and
prejudicial to the Revenue and remitted the matter for consideration to the
Assessing Officer. The Tribunal set aside the order of the Commissioner.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as follows:

“i)  The ruling of the Tribunal is largely based
upon the recognition of Accounting Standard-7 in the given facts and
circumstances of the case and that in fact the matter had received scrutiny by
the Assessing Officer at the stage of original assessment. Besides this method
was a known and recognised method of accounting and approved as a proper one.

ii)   Therefore,
the Tribunal was right in holding that the exercise of power u/s. 263 of the
Act was not warranted.”

21. Transfer pricing – A. Y. 2006-07 – International transaction – Arm’s length price – Selection of comparables – Company outsourcing major parts of its business cannot be taken as comparable for company not outsourcing major part of its business

Princ. CIT vs. IHG IT Services (India) P. Ltd.; 392 ITR 77
(P&H):

For the A. Y.  2006-07,
the Tribunal excluded the companies N and G from the list of comparables on the
ground that a substantial part of their business was outsourced and outsourcing
exceeded 40%, which was not so in the case of the assessee. In the case of N,
the Tribunal held that it was not a valid comparable also on the ground that
another company had been merged into it.

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under:

“i)  Both the companies were not appropriate
comparables, since a major part of their business was outsourced, whereas the
major part of the assessee’s business was not outsourced.

ii)  Moreover, the company V had a low employee
cost of Rs. 1.25% of operating revenue. The assessee’s wages to sales was 53%
which was not comparable to V. Thus the exclusion of N and V was justified.”

20. Return – Belated revised return for claiming exemption in terms of Supreme Court decision and CBDT circular – High Court has power to direct condonation of delay and granting of exemption

S. Sevugan Chettiar vs. Princ. CIT; 392 ITR 63 (Mad):

The assessee, an employee of ICICI Bank, retired under the
Early Retirement Option Scheme, 2003. For the year of retirement the assesee
filed the return of income and the assessment was finalised. Subsequently, the
assessee came to know that the Supreme Court, in the case of S. Palaniappan
vs. ITO (2015) 5 ITR-OL 275 (SC) held that a person, who has opted
for voluntary retirement under the Early Retirement Option Scheme shall be
entitled to exemption u/s. 10(10C) of the Act. Following the decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Supreme
Court be brought to the notice of all officials in the respective jurisdiction
so that relief may be granted to such retirees of the ICICI Bank under Early
Retirement Option Scheme 2003. On coming to know of this, the assessee filed a
revised return claiming the benefit u/s. 10(10C) of the Act, referring to the
said decision and the circular. The Assessing Officer rejected the claim on the
ground that the revised return was filed beyond the time stipulated u/s. 139(5)
of the Act.

The Madras High Court allowed the assesee’s writ petition and
held as under:

“i)  Clause (c) of sub-section (2) of section 119
of the Income-tax Act, 1961 states that the CBDT may, if it considers as
desirable or expedient so to do for avoiding genuine hardship in any case or
class of cases, by general or special order, relax any requirement contained in
any of the provisions contained in Chapter IV or Chapter VI-A of the Act. Thus
if the default in complying with the requirement was due to circumstances
beyond the control of the assessee, the Board is entitled to exercise its power
and relax the requirement contained in Chapter IV or Chapter VI-A. If such a
power is conferred upon the Board, this Court, while exercising jurisdiction
u/s. 226 of the Constitution of India, would also be entitled to consider
whether the assessee’s case would fall within one of the conditions stipulated
u/s. 119(2)(c).

ii)  The Board issued a circular on 13/04/2016 with
a view to grant relief to retirees of the ICICI Bank under the Early Retirement
Option Scheme. The circular issued by the CBDT was in exercise of powers
conferred u/s. 119.

iii)  The assesee being a senior citizen could not
be denied the benefit of exemption u/s. 10(10C) of the Act and the financial
benefit that had accrued to him, which would be more than a lakh of rupees. The
Respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order.”

19. Penalty – Concealment of income – Sections 92CA and 271(1)(c) – Recomputation of arm’s length price of specified domestic transaction not carried out at arm’s length – Transactional net margin method or comparable uncontrolled price method – difference in method leading to rejection of loss claimed in respect of genuine new line of business – Penalty cannot be imposed –

CIT vs. Mitsui Prime Advanced Composites India Pvt. Ltd.;
392 ITR 280 (Del):

Based upon the Transfer Pricing Officer’s Determination of
the arm’s length price, the Assessing Officer rejected the assessee’s claim
that the transactional net margin method was applicable and adopted the
comparable uncontrolled price method u/s. 92CA of the Act, where the difference
in the method led to the rejection by the Assessing Officer of the losses
claimed by the Assessee. The assessee did not appeal as it had consistently
incurred losses. The Assessing Officer initiated penalty proceedings on the
ground that an adverse order u/s. 92C attracted the Explanation 7 to section
271(1)(c). The Assessing Officer was of the opinion that the explanation
offered by the assessee was not satisfactory and did not display good faith,
which was a prerequisite under Explanation 7. He therefore imposed penalty u/s.
271(1)(c) of the Act. The Tribunal found that the assessee had acquired
business from one GSC for supply of products as well as availing the
engineering services to set up a plant for manufacturing the designated
products which included the manufacturing facility and resulted in the sale of
goods and which indicated the benefit derived by the assessee from the three
international transactions with its associate enterprises. The Appellate
Tribunal held that to say that the assessee did not avail of any services at
all was incorrect. It also held that the assessee had not only acquired the new
business but also had availed of the services to set up a plant, the details of
which were disclosed to the Transfer Pricing Officer by a letter, which was
sufficient elaboration of the nature of services availed of by the assessee
under the three international transactions. It also held that since no
manufacturing activity was done by the assessee, in the past as it was simply a
trader, acquiring of “business” and availing of the services under the three
agreements with its associated enterprises could not be characterised as
duplication of services. The Tribunal deleted the penalty.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:

“i)  The Appellate Tribunal did not in any manner
deviate from Explanation 7 to section 271(1)(c) of the Act. Furthermore having
regard to the fact that the assessee’s claim was in respect of a new line of
business of manufacturing introduced for the first time in the given year, its
failure per se could not have trigged the automatic presumptive
application of Explanation 7 of section 271(1)(c) as perceived by the
authorities.

ii) The
application of the exception had to be based on the facts of each case and no
generalisation could be made. The Appellate Tribunal had elaborately dealt with
the rationale in rejecting the imposition of penalty by the Assessing Officer
and had not committed any error of law.”

18. Co-operative society – Deduction u/s. 80P(2)(a)(i) – Society providing credit facilities to members – Finding that assessee not a co-operative bank and its activities confined to its enrolled members in particular area – Class B members enrolled for purpose of availing of loans and not participating in administration are also members – Benefit of exemption cannot be denied to assessee

CIT vs. S-1308 Ammapet Primary Agricultural Co-operative
Bank Ltd; 392 ITR 55 (Mad):

The assessee was a co-operative society involved in banking
and trading activities. It filed a Nil return after claiming deduction u/s.
80P(2)(a)(i) of the Act. The Assessing Officer disallowed the claim of the
assessee on the ground that the assessee had lent monies to the members, who had
undertaken non-agricultural/non-farm activities and had received commercial
interest, that since interest was received, the non-farm sector loans did not
qualify for deduction u/s. 80P(2)(a)(i), that the activity of the assessee was
in the nature of commercial banking activity, that u/s. 80P(2)(a)(i), deduction
was available only if primary agricultural credit societies were engaged with
the primary object of providing financial assistance to its members for
agricultural activities. The Commissioner (Appeals) allowed the assessee’s
claim. The Tribunal perceived that in the definition of “member” u/s. 2(16) of
the Co-operative Societies Act, 1983, the associate member under clause 2(6)
was also included. It held, that therefore, the enrolled class B members who
had availed of loans from the assessee could not be treated as non-members and
consequently held that the assessee was entitled to deduction u/s. 80P(2)(a)(i)
of the Act.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under:

“i)  The appellate authorities had clearly
perceived that the assessee was not a co-operative bank and that the activities
of the assessee were not in the nature of accepting the deposits, advancing
loans, etc., but was confined to its members only and that too in a
particular geographical area.

ii)  Exemption u/s. 80P(2)(a)(i) could not be
denied on the ground that the members of the assessee society were not entitled
to receive any dividend or have any voting right or right to participate in the
general administration or to attend any meeting etc., because they were
admitted as associate members for availing of loans only and were also charged
a higher rate of interest.

iii)   The
assessee society was entitled to deduction u/s. 80P(2)(a)(i) of the Act.”

17. Charitable purpose – Registration u/s. 12AA – A. Y. 2009-10 – Cancellation of registration- Assessee a housing development authority constituted under Act of Legislature – No activity demonstrating that assessee not genuine trust – No material indicating that assessee or its affairs not carried out in accordance with object of trust – Registration cannot be cancelled

DIT(E) vs. Maharashtra Housing and Area Development
Authority; 392 ITR 240 (Bom)

The assessee is a housing development authority registered
u/s. 12AA of the Act. The Director of Income-tax (Exemption) received a
proposal from the Assistant Director stating that the assessee had been
carrying on activities in the nature of trade, commerce or business, and had
gross receipts therefrom in excess of Rs. 10 lakh and that the proviso
to section 2(15) of the Act, would be attracted and therefore requested to
consider the withdrawal of registration. The Director referred to the details
of income in income and expenditure account and profit of Rs. 114.48 crore out
of sale of housing and income by way of lease rent, tenancy deposits, and based
on that issued a show cause notice to the assessee. The assessee pointed out
that its activities were in furtherance of the Maharashtra Housing and Area
Development Act, 1976, it had no profit motive, far from indulging in any trade
or commerce and it gave houses to middle class families at affordable rents,
that the income was on account of sale of housing stock and not from a
systematic commerce and business activities. The Director (Exemption) cancelled
the registration. The Tribunal held that the assessee was entitled to
registration and set aside the order of cancellation of registration.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under:

“i)  There was nothing referred to by the Director
(Exemption) which could show that the assessee was undertaking any activity
which would demonstrate that it was not a genuine trust or institution. There
was no material which would indicate that the assessee or its affairs were not
being carried out in accordance with the object of the trust or institution.

ii)  These
two aspects referred to in subsection(3) of section 12AA of the Act, and the
materials in that behalf were completely lacking. Therefore, there was no
reason for the Director (exemption) to exercise the power which he purported to
exercise.”

16. Capital gain – Exemption u/s. 54F – Investment of capital gain in purchase of residential house outside India before amendment by Finance No. 2 Act, 2014 – Assessee entitled to exemption u/s. 54F

Leena Jugalkishor Shah vs. 392 ITR 18 (Guj):

The assessee, a non-resident Indian, disposed of property
situated in India and purchased a residential house in United States. The
assessee claimed exemption u/s. 54F of the Act, in respect of the investment of
capital gain in the residential house in United States. The Assessing Officer
held that the residential house purchased outside India was not subject to tax
in India within the meaning of section 54F of the Act, and thus disallowed the
claim for exemption u/s. 54F of the Act. The Tribunal confirmed the
disallowance.

On appeal by the assessee, the Gujarat High Court reversed
the decision of the Tribunal and held as under:

“i)  The assessee had purchased a residential house
in the United States out of the capital gains on sale of plot in India and thus
she had fulfilled the conditions stipulated in section 54F of the Act. The
assessee invested the capital gains in a residential house within the
stipulated time.

ii)  There was no condition in section 54F of the
Act at the relevant time that the capital gains arising out of transfer of
capital asset should be invested in a residential house situated in India. The
language of section 54F of the Act before its amendment was that the assessee
should invest capital gains in a residential house. It was only after the
amendment to section 54F of the Act, by the finance (No. 2) Act, 2014, which
came into force w.e.f. April 1, 2015 that the assessee should invest the sale
proceeds arising out of sale of capital asset in a residential house situated
in India within the stipulated period.

iii)  When section 54F was clear and unambiguous,
there was no scope for importing into the statutes words which were not there.
Moreover, when the language of a taxing provision was ambiguous or capable of
more meanings than one, then the court had to adopt the interpretation which
favoured the assessee.

iv)   The
benefit of section 54F before its amendment could be extended to a residential
house purchased outside India and hence the claim of exemption was to be
allowed.”

15. Appellate Tribunal – Order to be passed within 90 days – Section 254(1) and ITAT Rules 34(5)(c) and 34(8) – A. Y. 2009-10 – Rule requiring order to be pronounced within 90 days of conclusion of hearing – Tribunal passing order beyond period of 90 days – Assessee applying rectification on ground delay operated to its prejudice – Rejection not justified – Tribunal to consider rectification application afresh

Otters Club vs. DIT(Exemption); 392 ITR 244 (Bom):

The Tribunal passed the order dated 03/02/2016 u/s. 254(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the
“Act”) 1961 beyond the period of 90 days from the date of conclusion
of its hearing on 22/09/2015 for the A. Y. 2009-10. The assessee’s application
for rectification of the order on the ground that this delay resulted in
prejudice to the parties as binding decisions of co-ordinate Benches though
referred to were ignored, was dismissed.

The Bombay High Court allowed the assessee’s writ petition
and held as under:

“i)  The Tribunal while rejecting the rectification
application did not dispute the fact that the order dated 03/02/2016 was passed
beyond the period of 90 days from the date of conclusion of its hearing.
However, it recorded that administrative clearance had been taken to pass such
an order beyond the period of 90 days.

ii)  The meaning of “administrative clearance” was
not clear in the face of rule 34(5)(c) read with rule 34(8) of the
Income-tax(Appellate Tribunal) Rules, 1963. The provisions mandated the
Tribunal to pronounce its order at the very latest on or before the 90th day,
after the conclusion of the hearing. Therefore, the order was not sustainable.

iii)  The
Tribunal was to consider the rectification application afresh.”

14. Penalty: Section 271(1)(c) – A. Ys. 2003-04 to 2006-07- Assessing Officer initiating penalty proceedings for furnishing of inaccurate particulars of income and imposing penalty for concealment of income- Order imposing penalty to be made only on ground on which penalty proceedings initiated and not on fresh ground of which assessee had no notice- Penalty to be deleted

CIT vs. Samson
Perinchery; 392 ITR 4 (Bom):

The Assessing Officer
issued notice for penalty u/s. 271(1)(c) of the Act, 1961 on the ground of
furnishing inaccurate particulars of income. However, he passed order imposing
penalty on the ground of concealment of income. The Tribunal deleted the
penalty on the ground that the initiation of penalty by the Assessing Officer was
for furnishing inaccurate particulars of income while the order imposing
penalty was for concealment of income and it could not be that the initiation
would be only on one limb, i.e. for furnishing inaccurate particulars of income
while imposition of penalty on the other limb, i.e. concealment of income.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

“i)  The
satisfaction of the Assessing Officer with regard to only one of the two
breaches u/s. 271(1)(c) of the Act, for initiation of penalty proceedings would
not permit penalty being imposed for the other breach. Thus, the order imposing
penalty was to be made only on the ground on which the penalty proceedings were
initiated and it could not be on a fresh ground of which the assessee had no
notice.

    

ii)  The Tribunal rightly deleted the penalty. The appeals are
dismissed.”

13. Income – Assessability – Land purchased for company by its director – Land shown as stock-in-trade of company – sale of land also shown in books of company and gains offered for tax – gains not assessable in hands of director

CIT vs. Atma Ram Gupta;
392 ITR 12(Raj):

The assessee was a
director of a company engaged in real estate business. In the course of
business, the company purchased land in the name of the director and duly
accounted for it in the books of the company. The sale proceeds of the land at
Rs. 1,51,80,000/- were duly recorded in the books of account of the company and
business profits were offered to tax in the case of the company. However, the
Assessing Officer was of the opinion that the resultant gain being short term capital
gains amounting to Rs. 1,23,47,880/- is liable to be taxed as short term
capital gains in the hands of the assessee. The Tribunal set aside the
assessment.

On appeal by the Revenue,
the Rajasthan High Court upheld the decision of the Tribunal and held as under:

“i)  The
material placed by the assessee and considered by both the appellate
authorities, clearly proved that the assessee being a director executed title
deeds for and on behalf of the company and the beneficial owner for all
practical purposes was the limited company which had even paid due taxes later
on at the time when the property was sold.

ii)            The finding by the appellate Tribunal was essentially a
finding of fact based on the material on record after appreciation of evidence
and no question of law much less a substantial question of law could be said to
arise out of the order passed by the Tribunal and there was no perversity in
the order impugned so as to call for interference of the court. The amount was
not assessable in the hands of the assessee.“

12. Educational Institution – Exemption u/s. 10(23C)(vi) – A. Ys. 2008-09 and 2009-10 – CBDT Circular to the effect that approval granted on or after 01/12/2006 to operate in perpetuity till withdrawn – Assessee seeking exemption for A. Y. 2008-09 but withdrawing it pursuant to CBDT Circular – Order of Commissioner holding application delayed and denying exemption – Contrary to law – Assessee entitled to exemption – Directions to Commissioner to pass fresh orders

Param Hans Swami Uma
Bharti Mission vs. CCIT; 391 ITR 131 (P&H):

The assessee, an
educational institution, was granted exemption u/s. 10(23C)(vi) of the Act,
1961 for the A. Y. 2007-08 by the Chief Commissioner. The Assessee filed an
application seeking exemption for the A. Y. 2008-09, but was served with a
notice u/s. 147 on the premise that no exemption order was passed u/s.
10(23C)(vi). The Assessing Officer dropped the reassessment proceedings in view
of the Circular No. 7 dated 27/10/2010, issued by CBDT which clarified that the
approval issued once is perpetual till it was withdrawn. The assessee filed an
application to withdraw the application for exemption. The Chief Commissioner
ignoring the Circular dismissed the applications as barred by time and held the
assessee disentitled to exemption for the A. Ys. 2008-09 and 2009-10.

The assessee filed writ
petition challenging the said order. The Punjab and Haryana High Court allowed
the writ petition and held as under:

“i)  As
clause (4) of the CBDT Circular No. 7 of 2010 provided that an exemption once
granted operated in perpetuity till it is withdrawn, the orders passed by the
Department ignoring the circular were contrary to law and liable to be set
aside.

       

ii)  The Commissioner was to pass fresh order on the
application considering the relevant      clause of the circular.”

11. Disallowance of expenditure – Exempt income – Section 14A – A. Y. 2011-12 – Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year

CIT vs. Chettinad
Logistics (P.) Ltd.; [2017] 80 taxmann.com 221 (Mad)

The assessee was engaged
in the business of trading, clearing and forwarding. The Assessing Officer had
added certain amount by disallowing expenditure u/s. 14A of the Act, 1961. The
Commissioner (Appeals) deleted the addition. During the course of arguments
before the Tribunal, the assessee advanced a submission, that in cases, where
investments were made in sister concern (s) out of interest free funds, for
strategic purposes, the provisions of section 14A could not be invoked. The
Tribunal remanded the matter to the Assessing Officer so as to reach a
conclusion as to whether investments had been actually made in sister concerns
of the assessee, out of interest free funds

On appeal by the Revenue,
the Madras High Court held as under:

“i)  This
exercise, in the given facts which emerge from the record, was clearly
unnecessary, as the Commissioner (Appeals) had returned the finding of fact
that no dividend had been earned in the relevant assessment year. Section 14A,
can only be triggered, if, the assessee seeks to square off expenditure against
income which does not form part of the total income under the Act.

ii)  The
Legislature, in order to do away with the pernicious practice adopted by the
assessees, to claim expenditure, against income exempt from tax, introduced the
said provision. In the instant case, there is no dispute that no income i.e.,
dividend, which did not form part of total income of the Assessee was earned in
the relevant assessment year. Therefore, the addition made by the Assessing Officer
by relying upon section 14A, was completely contrary to the provisions of the
said section.

iii)  The
revenue submitted that it could disallow the expenditure even in such a
circumstance by taking recourse to Rule 8D. Rule 8D only provides for a method
to determine the amount of expenditure incurred in relation to income, which
does not form part of the total income of the assessee. Rule 8D cannot go
beyond what is provided in section 14A. Therefore, rule 8D cannot come to the
rescue of the revenue.

iv)           In any event, the Tribunal, via, the impugned judgment has
remitted the matter to the Assessing Officer. Therefore, for the foregoing
reasons, no interference is called for qua the impugned judgment.”

10. Capital asset – Agricultural land – Sections 2(1A) and 2(14) – A. Y. 2007-08 – Where assessee sold a piece of land in view of fact that assessee had planted various fruit bearing trees on land and produce was being used for personal consumption and, moreover, assessee had not filed an application for conversion of land for non-agricultural propose, it was not a ‘capital asset’ u/s. 2(14) and, thus, gain arising from sale of it was exempt from tax

Shankar Dalal vs. CIT;
[2017] 80 taxmann.com 41 (Bom):

The assessee was
individual deriving income from salaries and income from other source (interest
income). He was also co-owner of an ancestral agricultural land along with
other family members. The land was situated within the limits of village
Panchayat. During relevant year, i.e. A. Y. 2007-08, assessee sold said land.
He claimed gain on sale of agricultural land as exempt since the land did not
constitute ‘Capital Assets’ as defined u/s. 2(14). The Assessing Officer
rejected assessee’s claim holding that the land did not constitute agricultural
land since no agricultural operations were carried out regularly and same was
sold to a company engaged in the business of development of infrastructure
activity. The Tribunal upheld the order of Assessing Officer.

On appeal by the assessee,
the Bombay High Court reversed the decision of the Tribunal and held as under:

“i)  The
impugned order and the whole action of the department proceeds on the
foundation that the land in question so transferred is a “non-agricultural
land” and falls within the ambit of “non-agricultural land”
because of use and/or non-use and/or stated to be unused for specific
agricultural purpose for want of labour and no-agricultural operations and/or
no specific regular income continuously for three years, as required and many
other such facets.

ii)  For the
purposes of such transfer of land, one has to consider the provisions of the
Goa, Daman and Diu Land Revenue Code, 1968. (Code) and the Rules made
thereunder and so also the definition so provided to deal with the concept of
“agricultural land”. Under the Code, there was no bar that an
agriculturist and/or one who possesses agricultural land cannot transfer such
land to any third party who is not agriculturist. Nothing contrary has been
pointed out and/or placed on record that any permission and/or formalities are
required to be completed before transfer of such lands. Under the Code, a transfer
could be made to a non-agriculturist and/or to a person whose activities are
not related to agricultural project or purpose

iii)  The
assessee had received the consideration. Admittedly, the property was not
divided and/or sub-divided. Admittedly, before transfer of the property, the
parties were fully aware about the nature of the land which includes rocky
area, used and usable area for agricultural, number of trees, plants growing or
in existence for so many years, apart from certain plantations. Being the
ancestral agricultural property, the families were using the agricultural
produce for their own consumption.

iv) Here, at
this stage, it is relevant to note the definition of the term
“agriculture”. This definition, ought not to have been overlooked,
while taking any action against the assessee. The definition itself provides
that expression “agriculture” means raising of useful or valuable
products which derive nutriment from the soil with the aid of human labour.
This inclusive definition, no where provides and/or takes away rights of the
assessee to treat such land as an agricultural land which they had been using
before transfer and/or till the date it came to be transferred as an
“agricultural land”

v)  The
definition of “agriculture” itself permitted, such unused land to be
used and utilised even for grazing, horticulture, dairy farming, stock
breeding. This is clear terms of the law and so also the intent of the Code
which governs such agriculture land and its transfer. The report so submitted
and/or referred to by the department against the assessee, is unsustainable,
unacceptable and contrary to the specific provisions of the Code. All the
“agriculture” activities so defined covers the agriculture land in
question. Therefore, exemption from the capital gain is the only option, on
fact and the law.

vi) The whole
approach of the Tribunal and the Assessing Officer is incorrect and
unsustainable in law. Section 105 of the Code further clarifies the position
with regard to presumption of correctness of entries in the record of rights
and register of mutations. It provides that an entry in the record of rights,
and certified entry in the register of mutation shall be presumed to be true
and until the contrary is proved or a new entry is lawfully substituted
therefor. The assessee has placed on record material to justify their claim.
There is no issue with regard to assessee’s ownership, title and the name
recorded in the land records at the relvant time. Even, otherwise, in view of
settled position of law, all concerned are bound by the entries, unless contra
material is placed on record. On the contrary, adverse findings are given by
the department solely based upon the so called inspection initially taken at
the stage of assessment by the concerned officer and later on by the Tribunal
Members. But the fact is that this inspection reports, in no way, has
considered the purpose and object of the Code and the definition of
‘agriculture’ so liberally mentioned.

vii) The
finding of facts recorded by the Tribunal itself confirms the position that the
case of the assessee falls within the ambit of definition of
“agriculture” as defined under the Code. The property requires to be
treated as agricultural land and its ‘activities are “agricultural”
in nature. In view of above, it is held that the property in question cannot be
treated as “capital asset” as contemplated u/s. 2(14)(iii). It is
wrong to hold, in view of the facts and circumstances and the nature of
agricultural land because of peculiar situation of the land near the sea side
or stony side of the sea, that assessees are not doing any regular agriculture
operation, this is also on the ground that they never showed agriculture income
out of it. Any agriculture produce and products can be for personal use also.

viii)In the result, the
impugned order of the Tribunal is set aside and assessee’s appeal is allowed.”

9. Capital gain or business income- A. Y. 2006-07 – Where assessee converted the stock-in-trade of shares into investments and sold the same at a later stage, profit arising from sale of shares shall be deemed to be capital gains and not business income -Since shares were held as long-term capital asset, profit arising from sale of share shall be exempt from tax u/s. 10(38)

Deeplok Financial
Services Ltd. vs. CIT; [2017] 80 taxmann.com 51 (Cal):

The assessee was a company
which was engaged in the business of leasing, finance and investment. On 1st
April, 2004, i.e. during the previous assessment year 2005-06 the
assessee transferred certain shares from its trading stock into investments. In
the A. Y. 2005-06, the assessee sold some of those shares and some more shares
were sold in the A. Y. 2006-07, the relevant year. The assessee claimed the
profit as capital gain and for the A. Y. 2006-07 claimed exemption u/s. 10(38)
of the Act, 1961 as long term capital gain. In the assessment u/s. 143(3) of
the Act, for the A. Y. 2005-06, the Assessing Officer did not accept the
assessee’s claim for conversion of shares from stock-in-trade into investment.
That decision was appealed against and carried up to the Tribunal which
confirmed the same. The assessee though preferred a delayed appeal to the High
Court but was unsuccessful in having the delay condoned and thereby lost that
right of appeal. For the assessment year under consideration i.e. A. Y.
2006-07, the Assessing Officer following the assessment order of the previous
year held accordingly on this claim of conversion by the assessee. The CIT(A)
allowed the assessee’s appeal but the Tribunal upheld the decision of the
Assessing Officer following its order for the A. Y. 2005-06.

The assessee filed appeal
before the Calcutta High Court and raised the following substantial question of
law:

     “Whether
on the facts and circumstances of the case the Tribunal erred in affirming the
order of the AO disregarding the conversion of the trading shares into
investment shares and treating the long term capital gain of Rs.22,27,819/-
arising from the sale of those shares as profit of trading in shares and
bringing the same to tax?”

The High Court formulated
another substantial question of law as under:

     “Whether
the Tribunal was correct in holding that the profit arising from the sale of
the said shares is chargeable to tax in the hands of the assessee as its
business income and not long term capital gain since in the assessee’s own case
in the previous assessment year the conversion of the shares was not accepted
by the Tribunal?”

The High Court decided to
answer both the questions. The High Court held as under:

“i)  A person
cannot transact with himself. It is only after the asset is dealt with to a
third party can a profit or loss be ascertained on the basis thereon. There was
no bar imposed by the Income Tax Act, 1961 on an assessee from converting its
stock-in-trade into investment. That conversion could not be deemed to be a
transaction but when the asset is dealt with, the profit or loss is to be
ascertained and in the case of capital asset, if there is profit then to be
assessed as capital gain. That if shares be disposed of at a value other than
the value at which it was transferred from the business stock, the question of
capital loss or capital gain would arise.

ii)  In
Dhanuka & Sons(1980) 124 ITR 24 (Cal), the same situation was contemplated
where on stock transferred in investment account, the question of capital loss
or capital gain, was held, would arise if such shares be disposed of at a value
other than the value at which it was transferred from the business stock. We,
on noticing that the Tribunal did not really hold otherwise but had held
against the assessee on the point of res judicata, had formulated the
above question. Nevertheless for the reasons aforesaid we answer the question
suggested by the assessee in the affirmative and in its favour. In that regard
the said circular dated 29th February, 2016 has no application
because the assessee’s stand was not accepted by the Revenue.

iii)  So far
as the formulated question relating to res judicata is concerned, in
answering the same reference may be had to the decision in Amalgamated
Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara; AIR (1964) SC 1013
in which the Supreme Court, inter alia, held that generally, questions
of liability to pay tax are determined by Tribunals with limited jurisdiction
and so, it would not be inappropriate to assume that if they decide any other
questions incidental to the determination of the liability for the specific
period, the decisions of those incidental questions need not create a bar of res
judicata while similar questions of liability for subsequent years are
being examined.

iv) This
assessee lost its right of appeal to this Court on the question arising in the
previous assessment year on account of delay in preferring the same. There was
no adjudication on merits, of its claim of conversion, on appeal to the High
Court. The only reason given by the Tribunal in rejecting the claim of the
assessee for the previous assessment year, as would appear from its order dated
13th May, 2011, is that to the Tribunal it appeared there is no
provision in the Act in respect of conversion of stock-in-trade into investment
and its treatment. Hence, it held that the lower authorities rightly made the
addition as there was understatement of income by analysing the assessee’s
trading and investment account in shares. Thus, before us there is no
impediment for the assessee to seek adjudication on the point. The question
formulated is answered accordingly and in favour of the assessee.”

8. Business expenditure – Deduction on actual payment – Sections 37 and 43B – A. Y. 2007-08 – Export and import business – Misdeclaration- Evasion of customs duty – Search and arrest – Bail order by court on condition assessee’s deposit amount to be appropriated towards differential liability by custom authorities – Recovery of customs duty from amount deposited by assessee evident from order of Principal Commissioner of Customs. Allowable expenses

Princ. CIT vs.
Praveen Saxena; 391 ITR 365 (Del):

The assessee was a
proprietor of a concern doing export and import business. A search was
conducted by the customs authorities in the premises. The assessee was arrested
subsequently by the Directorate of Revenue Intelligence on the suspicion of
evasion of payment of duties. In the course of the court proceedings, the
customs authorities had contended that bail could be granted to the assessee
only if a substantial amount of the customs duty and penalty levied was
deposited. Therefore, the court directed the assessee to deposit the amount
which was to be appropriated by the customs authorities. In addition the
assessee was also directed to furnish an adequate security amount. For the A.
Y. 2007-08, the assessee claimed that the amount of deposit had to be allowed
u/s. 43B of the Income-tax Act,(hereinafter for the sake of brevity referred to
as the “Act”) 1961. The Assessing Officer disallowed the expenses on
the grounds that the amount was a penalty and consequently, even otherwise, in
the absence of an adjudication order, no amount was payable. The Commissioner
(Appeals) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under:

“i)  It was
evident from the order of the Principal Commissioner of Customs that the duty
element and the identical amount of penalty had been determined. If there was
no misdeclaration by assessee to the customs authority and consequential
differential liability towards differential duty, the Department could not have
contended that the amount duly paid constituted allowable expenditure on
account of statutory liability u/s. 43B of the Act. The assessee did not do so
but was rightly made to do so did not in any manner detract its basic liability
which it always had to satisfy.

ii)  Therefore,
the contentions of the Department were misconceived and were rejected. The
deposit amounts paid were expenses and within the ambit of section 43B. The
appeal is dismissed.”

7. ALP – International transaction – Sections 92 and 92C – R. 10B of I. T. Rules 1962 – A. Y. 2008-09 – Comparables accepted for earlier years excluded – Onus on Department to justify exclusion –

CIT vs. Welspun Zucchi
Textiles Ltd.; 391 ITR 211 (Bom):

The assessee was in export
business and entered into international transactions with its associated
enterprises. The assessee determined arm’s length price of exports to its
associated enterprises for the  A. Y.
2008-09, by benchmarking the price of exports of comparable companies, SEL and
VTI which had been accepted as comparables for the earlier assessment years.
Accordingly, no transfer pricing adjustment was made by the assessee. The
Transfer Pricing Officer while determining arm’s length price excluded two
companies SEL and VTI without assigning any reasons and enhanced the price of
exports made by the assessee to its associated enterprises. The Assessing
Officer in terms of the order of the Transfer Pricing Officer enhanced the
income on account of international transactions and passed an order. The
Tribunal held that the exclusion of the two companies was not justified.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) If the
Department was of the view that only because of the losses of the assessment
year in question the two companies were not comparable, further examination or
enquiry ought to have been done by it to find out whether loss was a symptom of
the reference points in Rule 10B(2) of the Rules making them non-comparable. It
was more so as the Department did not dispute that otherwise the two companies
were comparables to the assessee even on the parameters laid down in Rule
10B(2).

ii)  Therefore,
if the Department sought to discard the two companies SEL and VTI from the
comparables for the assessment year in question, the onus was upon the
Department to justify it. A finding has been recorded that the Department had
not shown that the two companies were consistently loss making companies, which
required examination to ascertain if it was hit by one of the reference points
mentioned in Rule 10B(2).

iii)  The
Department itself has accepted the companies SEL and VTI as comparables for the
earlier assessment years. The appeal is dismissed.”

20. Assessment – Transfer pricing – DRP is superior to AO- AO is bound by decision of DRP – ESPN Star Sports Mauritius

S. N.
C. ET Compagnie vs. UOI; 388 ITR 383 (Delhi):

In this
case, the DRP declared that the Assessing Officer lacked jurisdiction to deal
with an issue. However, the Assessing Officer passed a final assessment order
ignoring the order of the DRP.  

The Delhi
High Court allowed the writ petition filed by the assessee and held as under:

“i)  The
language used by the Assessing Officer while disagreeing with the binding order
of the DRP was wholly unacceptable.

ii)  The
draft assessment order dated 28/03/2014 and the final assessment order dated
28/01/2015, passed by the Assessing Officer were void ab initio and
liable to be quashed on that basis.”

52. Notice – Validity- Service of notice- Reassessment- Sections 148 and 282 – A. Y. 1996-97- Service of notice on accountant of assessee company- Power of attorney given to accountant to conduct assessment proceedings does not include authority to accept any fresh notice- Notice not validly served on assessee- Reassessment proceedings vitiated

CIT vs. Kanpur Plastipack Ltd.; 390 ITR 381 (All):

The managing director of the assessee company had executed a
power of attorney in favour of the company’s accountant to represent the
company in the assessment proceedings. Notice u/s. 148 of the Act, was served
on him. The Appellate Tribunal held that the assessment proceedings were
invalid and quashed the assessment order on the ground that the notice u/s. 148
was not validly served on the assessee.

On appeal by the Revenue, the Allahabad High Court upheld the
decision of the Tribunal and held as under:

“i)   The power of attorney had confined the
authority to representation to conduct the case. It did not include in it any
authority to accept any fresh notice.

ii)   The
person on whom the notice u/s. 148 of the Act was served was not the principal
officer of the assessee nor was there any material to show that he had been
authorized by the assessee to accept any notice. The Appellate Tribunal was
correct in concluding that the reassessment proceedings, which were initiated
on the basis of the notice u/s. 148 dated 28/05/2002 were vitiated.”

51. Income- Transport subsidy – whether income or capital- A. Y. 2001-02 – Transport subsidy to stimulate industrial activity in backward region is capital receipt and not income

Shiv Shakti Floor Mills P. Ltd. vs CIT; 390 ITR 346
(Gauhati):

For the A. Y 2001-02, the assessee had claimed the transport
subsidy received by it to stimulate industrial activity in backward region to
be capital receipt and not income. The Assessing Officer treated the subsidy as
income and made addition to the total income. The Tribunal upheld the addition.

On appeal by the assessee, the Gauhati High Court reversed
the decision of the Tribunal and held as under:

“The transport subsidy received by the assessee was intended
to stimulate industrial activity in the backward region, to generate employment
opportunities and bring about development in the North Eastern States and it
was not meant to provide higher profit for the entrepreneur. It was intended to
encourage investment in difficult and far flung states and the sum received as
subsidy could not be treated as revenue receipt.”

50. DTAA between India and Singapore- Shipping corporation in Singapore earning income from operations in India – Article 8 of DTAA stating that such income would be taxable in Singapore-Article 24 of DTAA stating that if income were taxed by contracting state on basis of remittance clause 8 would not apply – Certificate by Internal Revenue of Singapore that income accrued and was taxable in Singapore – Fact that freight receipts were remitted to UK not relevant – Income not taxable in India

M. T. Maersk Mikage vs. DIT( Int. Taxation); 390 ITR 427
(Guj):

ST was a shipping and transport company based in Singapore.
It was taxed as a resident of Singapore. During the period relevant to the A.
Y. 2011-12, ST had through ships owned or chartered by it, undertaken voyages
from various Indian ports and earned income from exporters and out of other
such business. ST through the assessee, filed return of income u/s. 172(3) of
the Act, declaring the gross profit calculations, but claiming Nil income
relying on article 8 of the DTAA between India and Singapore. According to ST
such income was taxable only in Singapore and therefore, was exempt from tax
under the Indian Income-tax Act. It produced a certificate issued by the
Internal Revenue Authority of Singapore dated 09/01/2013 which stated that the
income in question derived by ST would be considered as income accruing in or
derived from the business carried on in Singapore and such income therefore,
would be assessable in Singapore on accrual basis. The Assessing Officer held
that ST was not entitled to the benefit of article 8 of the DTAA by virtue of
the provisions contained in article 24 therein. He noted that the freight
receipts were remitted to London and not to Singapore. The assessee filed a
revision petition u/s. 264 of the Act which was rejected.

The Gujarat High Court allowed the writ petition filed by the
assessee and held as under:

“i)   Article 8 of the DTAA between India and
Singapore states that with reference to shipping and air transport profits
derived by an enterprise of a contracting state from the operation of ships or
aircraft in international traffic shall be taxable only in that state. Article
24 of the Agreement pertains to limitation of relief. The essence of article
24.1 is that in case certain income is taxed by a contracting state not on the
basis of accrual, but on the basis of remittance, the applicability of article
8 would be ousted to the extent such income is not remitted. This clause does
not provide that in every case of non-remittance of income to the contracting
state, article 8 would not apply irrespective of tax treatment of such income
is given.

ii)   In the absence of any rebuttal material
produced by the Revenue, one would certainly be guided by the factual
declaration made by the Internal Revenue Authority of Singapore in the
certificate and this declaration was that the income would be charged at
Singapore considering it as an income accruing or derived from business carried
on in Singapore. In other words, the full income would be assessable to tax on
the basis of accrual and not on the basis of remittance. The amount was not
taxable in India.”